What Constitutes a Jumbo Mortgage?
Mortgages are loans secured by your home. Most mortgages fall under the conforming loan limit, which means that Fannie Mae can buy or guarantee the mortgages. However, when the amount you borrow exceeds these limits, you must take out a jumbo mortgage, which cannot be backed by Fannie Mae.
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Size
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A jumbo mortgage is determined by the amount of money being borrowed. Fannie Mae, a government agency that secures mortgages, sets limits each year on how large a mortgage can be before it is too large to be backed. A jumbo mortgage refers to any mortgage that exceeds these limits. As of 2010, the general limit was $417,000, but in some areas the limits can go as high as $938,250.
Significance
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When mortgages are too large to be backed by Fannie Mae, lenders must keep them on their books for the duration of the mortgage. This means that the lender cannot use that money to issue other mortgages. For example, if a lender issues a $1 million jumbo mortgage, the lender is stuck waiting for the $1 million mortgage to be repaid rather than being able to sell the mortgage to the government and then use that $1 million to issue more mortgages.
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Qualifications
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Because of the size of the mortgages and the fact that the lender will have a hard time selling the loan, lenders have higher qualifications for borrowers looking to take out a jumbo mortgage. Standards can vary as credit becomes more or less available, but you should expect to put down about 20 percent as a down payment and have a credit score in the mid-700s to be approved.
Features
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According to Bankrate, most jumbo mortgages have an adjustable rate rather than a fixed rate. Most jumbo adjustable rate mortgages are tied to the London Interbank Offered Rate (LIBOR), but some use the one-year Treasury rate. These mortgages have an introductory rate that lasts for typically five to seven years and then adjusts annually based on the interest rate index to which the loan is tied.
Warning
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If the value of your home falls to the point that you have less than 20 percent equity in your home, you may not be able to refinance your jumbo mortgage at the end of the introductory period. Lenders usually require you to have at least 20 percent equity before they will even consider you for a refinance of a jumbo mortgage. In addition, jumbo mortgages are likely to have higher interest rates than conforming mortgages.
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References
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