Many home buyers pursue conventional financing as a way to get a mortgage. In some cases, East Nashville home buyers need to apply for a different kind of loan. Jumbo loans are intended to offer financing to home buyers in areas with a higher cost of living, or who need a loan for a more expensive home. Jumbo loans can be quite similar to conventional mortgages, but there are a few differences. Borrowers should understand these distinctions before they apply.
1. What Is a Conventional Loan?
In order to know what a jumbo loan is, home buyers should have a basic understanding of conventional loans. Conventional loans meet specific standards allowing them to be purchased by Fannie Mae and Freddie Mac, two government-sponsored organizations that buy and sell mortgages. These groups do not guarantee mortgages, like the FHA, VA, or USDA. Instead, they offer lenders support by buying conventional mortgage debt. When borrowers apply for a loan not using loan programs guaranteed by federal agencies, they are typically applying for a conventional loan.
2. What Defines a Jumbo Loan?
The reason for the classification of a jumbo loan may not be what buyers expect. The distinction exists to provide a limit for certain institutions that buy or guarantee loans. Specifically, a jumbo loan exceeds the amounts set by Fannie Mae and Freddie Mac. The numbers vary depending on the area, and the maximums go up virtually every year. For 2019, the limit in most counties is $484,350. Places with a higher cost of living may have higher limits, but the current maximum in those counties is $726,525.
Although this distinction is fairly simple to understand, what is means is a different matter. In essence, lenders can offer loans above these limits, but they will not qualify for loan guarantees or securitization. Fannie Mae and Freddie Mac often buy conventional loans and sell them to other entities, but they will not do this for jumbo mortgages. This means lenders are taking on a higher degree of risk when they grant a jumbo loan to a borrower.
3. How Do Jumbo Loans Differ from Conventional Loans?
Since the risk profile is higher for lenders than they face in conventional loans, the rules tend to be a little different. As a general rule, borrowers have to prove they have the income, credit, and debt situation to allow them to repay the loan without too much trouble. When lenders are not working within a conventional lending framework, they can make a few exceptions in areas like the debt-to-income ratio. This may make it easier for buyers in high-cost-of-living areas to qualify for a mortgage. However, lenders are still bound by the Consumer Finance Protection Bureau to confirm the buyer will be able to repay the mortgage.
The higher risk translates into different loan terms. As a general rule, buyers hoping to get a jumbo loan can expect:
- higher interest rates than conventional loans
- larger down payments
- stricter limits on the ratio of total debts to income
- higher credit score requirements
Although jumbo loans might be very similar to conventional lending, the actual details of the mortgage depend heavily on the individual borrower's application. Buyers who know they will need a jumbo loan may want to shop around to get the best terms.
4. Is the Application Process Different for Jumbo Loans?
The application process may seem quite like applying for a conventional loan, or it could be significantly different. It depends on the method the lender uses for processing the application and underwriting. Buyers can plan on providing evidence in the form of:
- income verification
- the last two years of tax returns
- Social security number for a credit check
- a few months of bank statements
The underwriting process may take longer than average, depending on the lender.
5. Are There Alternatives to Jumbo Loans?
Some people consider applying for a primary and secondary mortgage at the same time to avoid needing a jumbo loan. This may or may not be a wise choice, depending on the area and the loan terms a borrower can get. A jumbo loan is a single loan covering the whole mortgage amount, minus the down payment. With a piggyback second mortgage, buyers apply for a conventional mortgage loan at 80 percent of the loan-to-value, using a second mortgage to cover the rest. The second loan may come from a different lender than the primary. This approach can give buyers more choices, but they should plan to look at the terms carefully and compare them before making a decision.
Buying a home costing more than the average usually involves a discussion of jumbo loans. By looking at the differences between jumbo loans and conventional loans and considering a variety of options, buyers can select a mortgage most appropriate for their needs.