If one is willing to buy a property, more expensive than normal, he immediately needs financing. Like a conventional mortgage a jumbo mortgage, also known as a jumbo loan, provides financing for a property.
A Jumbo mortgage, as the name implies, offers a significantly higher loan value that exceeds the limits set by the Federal Housing Finance Agency (FHFA). Though a Jumbo loan and a conventional loan serve the same purpose, the main differences are the loan amounts and the borrower requirements.
Jumbo mortgages are generally needed to buy real estate whose purchase price exceeds conforming loan limits. It is the most common type of conventional non-conforming home loan which is offered by private lenders.
Some of the key features of a jumbo mortgage are :
It is designed for higher-end and expensive properties.
Jumbo loans come with a variety of terms and are typically available with an adjustable rate or a fixed interest rate.
Jumbo loans tend to have higher closing costs and interest rates than the traditional home mortgage, and it could be extremely difficult to qualify.
The value of a jumbo mortgage varies by country and even state.
These mortgages come with unique underwriting requirements and tax implications as they are designed to finance luxury properties in highly competitive local real estate markets.
Since there is no guarantee or security, jumbo mortgages carry more credit risk for the lenders.
Another reason that makes it riskier is that a huge amount of money is involved in this type of loan. The larger the loan amount, the longer the time to pay off which creates higher risks than most lenders allow.
Because of its risk factor borrowers must undergo more rigorous credit requirements than those applying for a conventional loan that possesses lower limits.
Before allowing a jumbo loan the lenders take some extra measures which ensure they lend the huge amount to the borrowers who have the capacity to make payments.
Jumbo loan lenders require cash reserves or proof of consistent income or liquid asset and debt-to-income (DTI) ratio to confirm the borrowers have the capacity to pay back the loan.
Though jumbo loans are riskier for lenders and stricter for borrowers they may be the only option at the time of purchasing a real estate property which costs larger- than -normal. So, weigh in your options before going ahead with it.
