A jumbo mortgage is a loan that exceeds the conventional conforming limits put in place by government-sponsored enterprises (Fannie Mae and Freddie Mac) that purchase most mortgages and package them for investors. A jumbo loan is considered a non-conforming bank statement mortgage because the loan amount issued goes over the set limits for conforming mortgages.
Fannie Mae and Freddie Mac are big agencies that buy most U.S home loans from banks and other lending firms thus giving them the chance to free up liquidity to issue more mortgages. When those agencies’ limits do not cover the complete loan amount, the mortgage is known as a jumbo mortgage.
Historically, the interest rates charged for jumbo loans by lenders were normally higher compared to the conforming mortgage loans. However, this is not necessarily the fact nowadays, because interest rates for jumbo loans are normally comparable to, and at times better than conforming mortgages.
Advantages of Jumbo Mortgages
- The major upside for borrowers is the fact that jumbo mortgages allow them to go over the limits set by Fannie and Freddie.
- The interest rates for jumbo loans fluctuate and might be higher or significantly lower than the conforming loan rates.
- A Jumbo mortgage is a convenient financing method because it eliminates the need for 2 conforming mortgage loans to finance a property.
Disadvantages of Jumbo Mortgages
Jumbo mortgage lenders have stricter guidelines, because they do not have support from Fannie or Freddie, making the loans riskier. To qualify for such loans, borrowers must have larger incomes, higher credit scores and larger reserves.
The interest rate that is charged on jumbo loans is normally more than for conforming loans because of the increased risk for the lender.
Down payment rules for jumbo mortgages are mostly stricter than for conforming loans. The credit score requirements are also very strict. To secure a jumbo loan, most lenders demand an excellent credit score. Some will only approve borrowers falling in the range of 680-700, while others may require a score of at least 720.
Jumbo loan lenders offer stringent restrictions on eligible homes. Some will only grant jumbo mortgages for the borrower’s main residence. Moreover, some lenders will not draft a jumbo loan for foreclosed property or a short sale, and some have certain requirements for condos vs. family houses.
Is a Jumbo Mortgage the Right Option for you?
Jumbo bank statement mortgage loans are normally aimed at high-income earners with great credit scores and plenty of reserves. Due to the loan size and no support from the government, lenders assume higher risk with jumbo loans.
A jumbo loan might be suitable for you if:
- You have strong and healthy finances
- You want to purchase a higher-price home.
- You are prepared to handle a huge, long standing financial commitment.