A jumbo loan is a mortgage for an amount that exceeds the limits set by Fannie Mae and Freddie Mac, the government-sponsored giants that buy most U.S. home loans and package them for investors.If you’re buying a mansion — or just a regular home in a high-priced area like Silicon Valley — you might need a jumbo loan.
The main benefit for borrowers is that a jumbo mortgage lets you borrow more than the limits imposed by Fannie and Freddie. For instance, if you’d like to borrow $1 million against a $1.5 million home, a jumbo loan makes it possible.
Some borrowers prefer to finance more of the home’s cost rather than tying up cash, making the jumbo mortgage a helpful financial tool and part of an overall investment strategy. You can still get a competitive interest rate and finance the home of your choice without being restricted by the dollar limit on conforming mortgages.
Just like a conforming loan, jumbo loans have a similar application and evaluation process. Mortgage lenders will look at your credit score, down payment amount, current debt, debt-to-income ratio, employment history, money left over from closing, and more.
Jumbo loans require borrowers to have an above-average credit score. This credit score gives borrowers access to the best loan options available. Remember, with a higher credit score you will get offered better rates and terms.
Money left over from closing, also known as reserves or post-closing liquidity, is closely looked at by your mortgage lender. If borrowers are applying for a jumbo loan, lenders like to see 12 months of reserves after the closing, half liquid (in a checking or savings account), and half calculated from retirement assets. Lenders can make exceptions if you have a low debt-to-income-ratio and a high down payment.
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