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A jumbo loan, also referred to as a jumbo mortgage or a non-conforming loan, is a specific type of financing that's designed for luxury properties and single-family homes in expensive real estate markets. Jumbo loans are called so because they surpass the conforming loan limits established by the Federal Housing Finance Agency (FHFA).

The difference between conforming and non-conforming loans

A conforming loan is any loan below the limit set by the Federal Housing Finance Agency (FHFA). In most U.S. counties, as of 2019, the limit for a conforming loan is $484,350. In places with more expensive homes (also referred to as high-cost areas), such as Washington D.C. and California, the limit is 150% more, or $726,525.

Conforming loans are bought, securitized, and guaranteed by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). The role of these government sponsored entities is to drive and stimulate the home loan market. They were set up by Congress to ensure that average Americans, regardless of economic means, could have access to home mortgages. Both organizations operate in the secondary mortgage market, which means they don't actually provide borrowers with loans, but rather purchase mortgages from financial institutions in order to securitize and guarantee them. However, neither of them ever purchase non-conforming loans.

A non-conforming loan is also called a jumbo loan or jumbo mortgage. A jumbo loan is a specific type of financing that's designed for luxury properties and single-family homes in expensive real estate markets. And since these loans are not securitized or guaranteed by Fannie Mae or Freddie Mac, they're considered riskier, which means the lender will require more from you, the borrower.

From the borrower's perspective, the biggest difference between a conforming and a non-conforming loan is availability. For example, if you're trying to buy a home in a high-cost area with a mortgage of $800,000, then you'll need to find a lender who provides non-conforming loans.

How to get a jumbo loan

There are many mortgage companies in the market today that provide jumbo loans, so you should be able to find a lender in your area with a simple online search. It's important to note that many lenders only give jumbo loans to borrowers for their primary homes. If you're trying to finance a vacation home, the list of lenders to choose from will be shorter.

In order to qualify for a jumbo loan, you'll have to have great credit, as in a FICO score of 700 or above.

You'll also need a low debt-to-income (DTI) ratio. In order to calculate your DTI, simply add up your monthly debt payments (credit cards, student loans, mortgages, etc.), and then divide that number by your average monthly income before taxes. Most lenders will not approve you for a jumbo loan if your DTI is over 43%. 

Since jumbo loans are riskier, they're more expensive for the borrower. Most lenders will require a large down-payment and a high mortgage rate. Your down-payment will be at least 20%, and you'll pay more each month to pay off the loan than you would with a conforming loan. 

If your credit just meets the bare minimum of 700, your DTI is not particularly low and your down payment is not particularly high, the lender may need more proof of reliability before giving you the jumbo loan. This issue can be solved with reserves. A reserve is a saved sum of money that can act as an emergency fund if you unexpectedly stop earning an income. With conforming loans, the lender may only require a reserve that's equal to the sum of one monthly mortgage payment. But with non-conforming loans, the required reserve could be equal to a year's worth of payments. 

Advice for getting approved

First, work on improving your credit. If your FICO score is below 700, prioritize paying off your debts so that you can bring up your credit score. In order to prove that you'll be able to consistently make loan payments, the lender will want to see a clear picture of your finances over the past two years at least. They'll also request documentation, such as tax returns, bank statements, W2s, and pay stubs. It is important to have all these items organized before you apply for the loan. Another factor to consider is if you recently declared bankruptcy, you likely won't be able to secure a jumbo loan. However, if you declared more than two years ago, the lender may be more lenient. Be sure to consult your mortgage lender on your available options after a declaration of bankruptcy.

Interested in learning more about jumbo loans and your options? We're here to help! Contact The Federal Savings Bank today.