A jumbo loan is a mortgage with an monetary amount that is above what the industry calls a conventional or conforming home loan. The main difference between conforming loans and jumbo loans is simply the dollar amount being borrowed.
A jumbo loan is a home mortgage that exceeds the conforming limit set by the Office of Federal Housing Enterprise Oversight (OFHEO) and is not eligible to be guaranteed by Fannie Mae or Freddie Mac. If a loan exceeds the conforming loan limit in the area you wish to purchase, this is considered a non-conforming mortgage, or jumbo loan.
In most counties across the U.S., a conforming mortgage for a single unit property cannot exceed $417,000 (a limit that has remained consistent since 2006). Additional exceptions can be made if you are trying to purchase a property in a high-priced market as federally designated.
If you are looking to buy a 2-unit property, that conforming limit increases to $533,850, for a 3-unit property it is $645,300, and for a 4-unit property it is $801,950. High priced markets such as California, Alaska and Hawaii might have conforming mortgages with limits from $625,500 and $729,750 for single unit properties. For example, many counties in California have conforming limits of $625,000.
Loans that go above these pre-set limits are called jumbo mortgages.
Currently, most housing markets across the U.S. view jumbo loans as those which are for amounts greater than $417,000 for single-unit dwellings. Depending upon where you are looking to buy – either the neighborhood or in some cases the actual state – this amount might be slightly higher. The types of homes that are purchased with jumbo loans are single-family residences, second homes, and investment properties.
The prices on these properties can range from just above the limits on the conventional mortgages to well over a million dollars. If the amount being borrowed is closer to the one million dollar mark, or higher, then the jumbo loan might be considered a super jumbo loan.
These high-end homes and big loans can produce a higher risk for lenders, which is why they require a great credit score and charge higher interests rates for carrying them. Lenders often require a minimum credit score of 640-700, while conventional mortgages usually require a credit score of at least 620. The interest rates tend to fluctuate, but for the past few years they have hovered around 0.5-1.00 percentage points higher than conventional mortgages.
Most lenders offer fixed rates that are fixed for 30 years, and adjustable rate mortgages (ARM) that are fixed for a certain amount of time. ARM loans will be fixed for only a certain amount of years from 1 year, 3 years, 5 years or 7 years. After the fixed period ends, the rate may adjust higher or lower depending on the index connected to the loan. Fixed rate loans usually have a slightly higher interest rate than ARM loans.
The down payment requirements will depend on your credit score and vary from lender to lender. You can expect to put as low as 10% down and up to 20%.
In addition to the above requirements, you will also have to show that you have some financial reserves (i.e. checking, savings, etc.). Many lenders require that you have 3-6 months monthly payment reserves in a bank account for a primary residence, and up to 12 months worth of reserves for a second home or investment property.