What Are Jumbo Loans, and How Do I Get One?

Getting the right mortgage loan is essential to secure your financial future. Various mortgage lenders are lending varied types of loans. If you are planning to get a loan above the conventional loan limit, you will need a jumbo loan. As the name itself suggests jumbo, so is the meaning of jumbo loan. It's huge in comparison to regular mortgage loans. You will need to go through the strict eligibility criteria to avail a jumbo loan. So, if you are in the market for a loan above the conventional loan limit, a jumbo loan may be right for you.

Though additional requirements for being eligible for loans and other special features make these loans a little harder to get approved, a jumbo loan can offer you attractive interest rates and terms. Please get to know about all of them in this article.

What Is A Jumbo Loan?

The conventional loan limit is the maximum amount of money that a Missouri mortgage lender will approve for a home loan. Jumbo loans are loans that exceed the limit of a conventional loan. As a result, a Missouri mortgage loan overcomes the limitation set by Fannie Mae and Freddie Mac. Compared to the traditional mortgages, jumbo loans have a higher interest rate. However, this may be worth it depending on the size of your loan and how long you plan to stay in your home.

The large loan size is what makes these mortgages "jumbo." In other words, a jumbo mortgage is a home loan that is larger than the traditional conforming loans offered by government-sponsored entities like Freddie Mac and Fannie Mae.

Qualifying for a Jumbo Loan

The eligibility criteria for jumbo loans are relatively stricter because of the added risk. To qualify for a jumbo loan, you must meet specific criteria.

Credit score

Lenders may require your FICO score above 700; sometimes, it reaches as high as 720 to qualify for a jumbo loan. Again, this is because the mortgage companies want to ensure that you are a low-risk borrower.

Debt-to-income ratio

Missouri mortgage lenders will also consider your debt-to-income ratio (DTI) to ensure you don't have too much debt. The DTI ratio is the percentage of your monthly income toward debt payments. Most lenders want your DTI to be below 45%.

Cash reserves

If you have ample cash on hand, you'll have a better chance of getting a jumbo loan. This is because the lender wants to ensure that you have the means to pay back your loan if you experience any financial difficulty.

Documentation

To prove that you are financially healthy, you'll need to provide documentation like your W-2s, tax returns, and bank statements. This documentation will gain the trust of the mortgage lender and help your application to be processed quickly.

Benefits of Jumbo Loans

With a traditional mortgage, you can borrow more money. This could be helpful if you're looking to buy a more expensive home or want to take out a home equity loan.

Jumbo loans allow you to choose between a 20% down payment and a lower down payment with private mortgage insurance.

Without jumbo loans, borrowers would be forced to take out two separate loans to purchase a home above the conforming loan limit. They even spend their whole life savings to pay them outright or offset conforming costs as jumbo loans offer the benefit of availing the loan above the limit. So, if you are considering the high loan limit, jumbo loans are your final destination to reach.

Why Are Jumbo Mortgages Treated Differently?

Get to know how the mortgage industry works: Mortgages are originated by lenders, secondly packaged into securities by investors, and lastly bought up by government-sponsored entities (GSEs) like Fannie Mae and Freddie Mac. However, these two government-sponsored entities are authorized to purchase only those mortgages that are conformed to the FHFA limits.

After purchasing this, Fannie Mae and Freddie Mac securitize the mortgages and sell them to investors in the secondary mortgage market. This is where it gets interesting: as GSEs are the only entities allowed to purchase these conforming mortgages, this, in turn, limits the supply of mortgages in the market, which in turn drives up the prices of the conforming mortgages (and by default, the jumbo mortgages).

What Are The Conforming Loan Limits?

The guaranteed limit set by Fannie and Freddie is based on how high the mortgage may be. This is known as conforming loan limits.

How does the Conforming Loan Limit Work?

The conforming loan limit is the highest amount that a mortgage lender will approve for a home loan. Any mortgage loan that exceeds this limit is considered a jumbo loan. For instance, in 2022, the conforming loan limit was $647,200. However, the maximum limit set by the U.S government for lavish areas like Alaska, Hawaii, Guam, and the U.S. Virgin Islands is $970,800. Such variation in the loan limit can be due to multiple reasons like the expensive real estate markets in certain areas or a higher cost of living. Anything above then this limit will fall under jumbo home loans.

Fannie Mae and Freddie Mac are two of the most well-known government-sponsored entities in the housing market. They both offer a variety of mortgage products, one of which is the conforming loan.

The maximum amount these two entities will guarantee is the conforming loan limit . Borrowers who take out a mortgage that exceeds the conforming loan limit run the danger of losing their home. Because of this, jumbo loans typically have a higher interest rate than conventional mortgages.

What If I Can't Find A House Within The Conforming Limits?

When the conforming loan limit is not reached in a specific area that is quite expensive, borrowers have the option to take out a jumbo loan. As mentioned earlier, jumbo loans are mortgages that exceed the conforming loan limit. Jumbo loans are available in both fixed-rate and adjustable-rate varieties.

The interest rates for jumbo loans are typically higher than those for conforming loans. Therefore, a more significant risk is involved when lending to someone borrowing above the conforming loan limit.

The Bottom Line

Happy to know about this hard yet beneficial loan? Never forget to contact the mortgage lenders near me in Missouri to avail the best jumbo loan deals. Jumbo loans are a lifesaver for those who need more financing than what a regular mortgage can offer. If you're looking for a large loan, compare interest rates and terms from different lenders before deciding. Thanks for reading!

With a little work, you can get the finance you need for your dream house or investment property.