A jumbo mortgage is a type of mortgage that applies to housing loans exceeding the conforming loan limits that are set by the Federal Housing Finance Agency (FHFA). These loan limits can vary from place to place, but for most of the country, the loan limit is $424,100. This means that jumbo mortgages cannot be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac, the two Government Sponsored Entities (GSEs) that often sell mortgages to borrowers.
Jumbo mortgages have unique underwriting requirements and tax implications, and are designed to finance high-value properties in expensive and competitive real estate markets. A jumbo loan in extremely expensive “high-cost zones” is a loan of more than $636,150. Additionally, there are 115 U.S. counties with loan limits that are higher than $424,100, yet lower than $636,150. It’s always best to check what the loan limit is in your local county.
People who wish to buy expensive homes (but have little money to offer initially) are usually going to require a jumbo mortgage. The high value of a jumbo mortgage means that is incredibly hard to qualify for, especially with the lack of a Fannie Mae or Freddie Mac guarantee. Potential homeowners looking to qualify for a jumbo mortgage will require excellent credit scores, often over 700. They will also require a very low debt-to-income (DTI) ratio that is under 43%, and preferably close to 36%.
Additionally, you’ll need to prove that you have the income and cash to hand over for your payments, as your payments are likely to very steep, especially if opting for a standard 30-year fixed-rate mortgage. You will require pay stubs dating back 30 days, as well as W2 tax forms dating back 2 years. Self-employed borrowers need to meet even more stringent requirements. Self-employed borrowers need to supply 2 years of tax returns and at least 60 days of current bank statements. Additionally, you are required to prove that you have the liquid assets to qualify, as well as cash reserves equal to six months of the potential mortgage payments.
Although some banks may charge 0.25% to 1.5% more interest on a jumbo loan, their interest rates have been steadily dropping after the housing crisis, with many banks now charging APR rates that are similar to the 4% or 5% rates that you may find with conventional mortgages.
Down payment requirements for jumbo mortgages are also close to those of conventional mortgages these days, with some being as low as 10% or 15% of the property’s value. Although this is useful, it is often advantageous to make a bigger down payment on a house, as this will make you a less risky borrower in the bank’s eyes.
Jumbo mortgages come with unique tax implications, as the IRS places a cap on mortgage interest deductions. You can deduct the interest providing that the mortgage is for $1 million or less. Larger mortgages will not be eligible for the rest of this tax break, and will only see interest deductions for interest on the first $1 million of their mortgage’s value.
Jumbo mortgages are primarily designed for a segment of high-income earners who make between $250,000 and $500,000 a year. These people are known as “HENRY”, which stands for “high earners, not rich yet”. These are people in high-paying jobs that are yet to amass their impending wealth.