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What is a Jumbo Mortgage Loan?

It’s no secret that home prices have skyrocketed over the past few years. In the past year alone, Arizona has seen a 30% increase in home values. It’s a trend that’s happening across the country. A new report from Zillow shows nearly a 18% increase in home values across the United States from August 2020 to August 2021.

The same home a buyer could have purchased with a conventional loan in 2020 may now require a jumbo mortgage loan.

What is a Jumbo Mortgage Loan?

A jumbo mortgage, often referred to as a jumbo loan, is used when a mortgage loan exceeds the conventional loan limits set by the Federal Housing Financing Agency (FHFA) for Fannie Mae or Freddie Mac. The loan limits for 2022 are set at $647,200 nationally, and may increase in some higher cost of living areas of the United States.

For example, in Arizona the conventional loan limit is $647,200, whereas in Hawaii the loan limit is $970,800.

Interactive Map Showing Loan Limits by State and County  

The FHFA sets these loan limits each year in November with an effective date of January 1st for the following year. Given the appreciation in home values over the last year, this amount can be expected to increase significantly in the near future.

Since jumbo loans are not secured by the federal government or purchased by Fannie Mae and Freddie Mac, these loans pose a higher risk for lenders. Therefore, obtaining a jumbo loan will have stricter guidelines than that of a conventional loan or a government backed loan such as an FHA loan.

How Does a Jumbo Loan Work?

When a mortgage loan surpasses the conforming loan limits, the lender no longer receives the guarantee on the loan from Fannie Mae or Freddie Mac. With the increased risk to the lender, the qualifying criteria to obtain a jumbo loan will come with stricter requirements.

Higher Minimum Credit Score

Jumbo loans will require a higher credit score than conventional or government backed loans. While this will vary from lender to lender, minimum credit scores for jumbo loans are typically 700 or higher.

Larger Cash Reserves

Since the lender is taking on more risk without the guarantee from Fannie Mae or Freddie Mac, lenders will often require the borrower to show more cash reserves. This will vary from lender to lender, but often the borrower may be asked to have six to twelve months of mortgage payments and expenses on hand as reserves.

Larger Down Payments

Larger mortgage amounts will require larger down payments in terms of dollars. Also, lenders will often require increased down payment percentages as the loan amount goes up.

Lower Debt-to-Income Ratio

Because of the increased risk, the lender will want to make sure the borrower will still be able to make the mortgage payment even during a financial hardship. One way to decrease the risk for the lender is to require a lower debt-to-income ratio (DTI) for jumbo loans.

Higher Closing Costs

Most mortgage loans will have closing costs of about 2% of the loan amount. However, borrowers can expect to pay higher closing costs with jumbo loans based on the added underwriting steps and larger overall loan amount.

Fixed Rate vs ARMs

When comparing loans, borrowers will often see a fixed rate or adjustable-rate option for a jumbo loan.

Fixed rate simply means the rate will remain the same for the life of the loan, or until the borrower refinances into a different rate or loan.

ARMs, or adjustable-rate mortgages, are mortgages where the rate can adjust throughout the life of the loan. The initial interest rate is fixed for a set period and then will adjust based on the market rates. After the initial fixed rate period, the loan can adjust annually, semi-annually, or in some rare instances even at monthly intervals.

Jumbo Loan Interest Rates

In the past, because of the increased risk, jumbo loan rates have often been higher than those of conventional or government backed loans.

However, in the current market, the gap between jumbo loans and other types of loans has narrowed, and in some cases, borrowers may even find lower rates for jumbo loans than for conventional loans.

What are Points?

Points, or discount points, are a type of prepaid interest collected at the time of closing in order to improve the interest rate and monthly payment for the life of the loan. One point is equal to one percent of the loan amount. Paying points is also known as buying down the rate because the borrower is paying an upfront fee for a lower interest rate.

Borrowers and lenders can work together to pay additional points to lower the overall interest rate or to even remove the points and pay a higher overall interest rate.

What is the Annual Percentage Rate (APR)?

When looking at jumbo loan rates, the borrower will see an interest rate and then an annual percentage rate (APR). APR is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan.

The APR is usually going to be higher than the interest rate because the APR includes both the interest rate and the added costs associated with the transaction to the borrower over the loan term. The added costs include points and other various finance charges the borrower is required to pay the lender.

Down Payments on a Jumbo Loan

In the past, jumbo loans required a much higher down payment than that of a conventional loan. Instead of 5% - 10% down payments you could expect with conventional loans, jumbo loans often required up to 20% - 30% down.

Fortunately, for borrowers, down payment restrictions have improved and borrowers can now find minimum down payment amounts starting at 5%.

At OneAZ, we offer 95% financing for loans up to $1,000,000.

Why Should I Take out a Jumbo Loan?

In the past, jumbo loans were primarily used for those who were purchasing a luxury home. However, with the rapid increase in home values over the past few years, jumbo loans are becoming more of a norm for a typical single-family home in the Arizona metropolitan areas.

What a borrower could purchase two years ago with a conventional mortgage for $450,000, may require a jumbo loan today for $650,000. And, until Fannie Mae and Freddie Mac raise the conforming loan limits, more and more borrowers will be looking for jumbo loans to meet their home-purchasing needs.

Have More Questions About Jumbo Loans?

Are you looking for a home in your area and know you will need a jumbo loan? Or are you looking to determine your monthly payment based on your down payment and the current interest rates?

Use the calculator below or reach out to the OneAZ mortgage team virtually, over the phone, or in person at any one of the branches across the state of Arizona.

Chris “Peach” Petrie is the founder of Money Peach. Money Peach partnered with OneAZ to provide free financial education to members across the state. To learn more about OneAZ’s partnership with Money Peach, click here.

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APR = Annual Percentage Rate

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