How to Get a Jumbo Loan for a High-Priced Home
Fannie Mae and Freddie Mac were created by the United States Congress and are known as "government-sponsored enterprises" (GSEs). This means they are privately owned, but receive support from the Federal Government, and assume some public responsibilities.
In the case of both Fannie Mae and Freddie Mac, they perform important roles in the nation’s housing finance system, bringing liquidity, stability and affordability to our national mortgage market. They provide ready access to funds (liquidity) by buying mortgages that were originated by the American banks, thrifts, credit unions, and mortgage companies that make mortgage loans directly to their customers so they can purchase a home.
Lenders use the cash raised by selling mortgages to the GSEs to make additional new loans. In doing so, Fannie Mae and Freddie Mac ensure that people who wish to buy homes have a continuous and stable supply of mortgage money.
However, like all large institutions, there are rules which govern their operation.
For instance, Fannie Mae and Freddie Mac have limits on the size of the loan amounts they are able to purchase.
The limit on a typical conventional loan for a single family home is $424,000 in most areas, and $636,150 in higher-cost areas. Fannie Mae and Freddie Mac are unable to buy mortgages which exceed those amounts.
So if you are a borrower who wishes to buy a higher-priced home which exceeds those amounts, what can you do? Acquiring a Jumbo Mortgage Loan is likely your best solution.
What is a Jumbo Loan?
A jumbo loan, also known as a jumbo mortgage, is a form of financing for homes that exceed the loan limits set by the Federal Housing Finance Agency (FHFA), for each individual county in the country. Jumbo loans are designed to finance expensive luxury properties and homes in high-priced real estate markets.
As mentioned above, a mortgage in excess of $424,100 is considered a jumbo loan for the vast majority of the continental U.S. However, in high-cost areas with expensive home prices, a loan is considered jumbo when it’s over $636,150.
To give a better idea of the limit amounts across the U.S., as of 2017, of the more than three thousand counties in the continental United States, 2,916 have a loan limit of $424,100. Only 108 counties have a higher loan limit of $636,150, including New York City, Los Angeles, and San Francisco. The majority of these high-cost areas are in California–which is no surprise, considering that the Golden State is home to some of the most expensive housing markets in the country.
Additionally, there are also 115 U.S. counties with loan limits that are higher than $424,100 but lower than $636,150. For instance, the loan limit in Fairfield County, Conn., is set at $601,450. In Suffolk County, Mass. (home to Boston), the limit is $598,000.
Limits are often even higher outside of the continental U.S. In fact, in Hawaii’s five counties range, they can vary between $636,150 and $721,050. Hawaii (along with Alaska, Guam and the Virgin Islands), is allowed to have higher loan limits.
For information on your county, here’s a link to a map that depicts all the counties in our country and specifies their corresponding loan limits.
Qualifying for a Jumbo Mortgage Loan
If you intend to buy a home whose price is half a million dollars or more–and you’re not paying for it in cash–then you're likely going to need a jumbo mortgage.
However, you should be aware that you will face much more rigorous and stringent credit requirements than homeowners applying for a conventional loan. That’s because jumbo loans carry more credit risk for the lender, due to their lack of a Fannie Mae or Freddie Mac guarantee, and because more money is involved.
To get approved for a jumbo loan, you’ll need an outstanding credit score–700 and above—and an extremely low debt-to-income ratio–under 43%, at least.
You’ll also need to prove that you have sufficient cash on hand to cover your jumbo mortgage payments, which are likely to be high if you opt for a standard 30-year fixed rate mortgage. Specific income levels and cash reserves depend on the size of the overall loan, but all borrowers need pay stubs dating back 30 days, and W-2 tax forms going back at least two years.
If you're self-employed, income requirements are even stricter–two years of tax returns and at least 60 days of current bank statements. Borrowers will also have to prove they have the liquid assets to qualify, and cash reserves equal to six months of the mortgage payments.
All applicants will also be required to present documentation on any other loans they might have, and provide proof of ownership of all other non-liquid assets, such as additional real estate holdings.
How much you are ultimately able to borrow depends on your assets, your credit score, and the value of the property you're interested in buying.
Eligible Jumbo Loan Borrowers
Jumbo loans are generally considered to be most suited to high-income earners who make between $250,000 and $500,000 a year. This segment even has its own acronym–“HENRY”–which stands for "high earners, not rich yet.” It refers to people who generally make a lot of money but don't have millions in extra cash or other accumulated assets.
While an individual in the HENRY segment may not have amassed the wealth to purchase an expensive new home with cash, these higher-income individuals usually do have stronger credit scores and more established credit histories than the average home buyer.
Along with their solid credit, higher-income earners also tend to have more established retirement accounts. They’ve often been contributing to investment accounts for a longer period of time than lower-income earners, and these can represent substantial sums of money.
Down Payment on Jumbo Mortgage Loans
In the past, jumbo mortgage lenders often required home buyers to put up 30% of the residence's purchase price (compared to 20% in conventional mortgages). Today, that figure has fallen as low as 10-15%.
The primary reason that down payment requirements have fallen is because lending institutions are generally eager to find new customers for their jumbo loan packages. Lending institutions actively seek to attract the sort of high net worth individuals who are likely to be jumbo mortgage borrowers. These clients are good assets, as they’re probably going to need additional wealth management and investment services in the future. It's also more advantageous for a lender to originate a single $2 million mortgage than ten $200,000 mortgages.
Though this is good news for jumbo loan borrowers, there is one tax aspect to a jumbo mortgage loan that borrowers need to be aware of.
You’re probably aware that that the mortgage interest you paid in any given year can be deducted from your taxes. But you may not be aware that the IRS places a cap on the amount of that deduction.
As long as the mortgage itself is $1 million or less, the mortgage interest can be fully deducted from your taxes. However, if your mortgage is larger than $1 million, you don't get the full deduction.
For example, if you took out a $2 million jumbo mortgage that accrues $60,000 in interest a year, you can only deduct $30,000 – the interest on the first million of your mortgage.
This might be an important consideration for home buyers who are planning on acquiring a jumbo mortgage loan.