Q

What's a jumbo loan?

A

Like a jumbo jet, or a jumbo marshmallow, a jumbo loan is just as advertised — a loan that’s a lot bigger than your normal run-of-the-mill loan.

But more specifically a jumbo loan is a home mortgage that exceeds the conforming loan limit as set by the Federal Housing Finance Agency (FHFA), the independent federal agency responsible for regulating Fannie Mae and Freddie Mac. These two folksy-named agencies keep mortgage interest rates low by purchasing from banks the vast majority of home loans in the United States and insuring them against default, just as long as the loans conform to certain specifications. One of those specifications is loan size. In order to be considered conforming, as of 2018, a loan must be $453,100 or less in most of the US, and $679,650 in high cost areas like New York and San Francisco. A jumbo loan is anything larger than that.

Because Fannie Mae and Freddie Mac won’t buy and securitize jumbo loans, traditionally the interest rates on them have been higher than conforming 30-year mortgages, but in order to lure the kind of wealthy clients who can afford million dollar houses in hopes they’ll use their other products and services, banks have lately slashed jumbo mortgage interest rates even below those of conforming mortgages. Those who hope to get a jumbo mortgage should be prepared for a deep, rigorous dive into their finances; because jumbo loans aren’t securitized by Fannie and Freddie, and because more expensive properties are tougher to sell for full market value when foreclosed upon, lenders will want to make certain you’re a sound buyer. You’ll need a FICO score of over 700, and a very, very low DTI, or debt-to-income ratio, meaning your income is very high relative in relation to the amount of debt you carry.

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