What is a jumbo mortgage?
A jumbo mortgage or jumbo loan is a mortgage that exceeds the limit value that can be purchased by Fannie Mae or Freddie Mac, according to Experian. In other words, mortgages that exceed the conforming loan limits set by these government institutions are considered to be jumbo mortgages.
Details on how mortgages work
When you apply for a mortgage, you promise the lender to pay off the mortgage principal, interest, and related charges. However, there is no guarantee that everything will go well as planned for the duration of the mortgage.
This is why the bank has to look into your credit history, credit score, and your financial standing. The better you meet these requirements, the higher the chances you will qualify for the loan.
To reduce the chances of losing money, your lender will require you to have homeowner’s insurance and perform property inspection to make sure that the house is being bought at its proper market value and it is not trash. Furthermore, if you get an FHA mortgage, you will be required to have mortgage insurance.
What will happen if you cannot make your monthly payments and the bank cannot sell the house after the foreclosure? In this case, the bank will lose money. If this happens to thousands of its borrowers, the bank will eventually go bankrupt. This is bad news for businesses. The government becomes a solution.
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The government offers protection to banks, credit unions, and lending institutions
The government provides incentives and protection against major losses to lending institutions Fannie Mae and Freddie Mac.
Fannie and Freddie are big institutions created by the government to keep the money flowing to mortgage and loan providers in order to support homeownership and rental housing, according to Freddie Mac. In other words, these two companies provide affordability, stability, and liquidity in the U.S housing market.
When you get a single-family home mortgage from a bank, the bank gives you the money and then sells that mortgage to one of those two companies (Fannie and Freddie). After buying these mortgages, those two government-sponsored companies bundle those mortgages into securities and sell them to private investors because they are secure.
Since the government has taken the risk, lending companies offer more mortgages and loans. This gives a chance to many people to own houses and keep mortgage companies afloat.
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How does a jumbo mortgage apply into this dilemma?
There is a limit to how much Freddie and Fannie can buy for every single borrower. The limit amount is mostly the same around the U.S with a few exceptions. Places with higher housing costs have a higher limit.
According to Bank Of America, Fannie and Freddie have a purchase limit of $510,400 in every state except in Alaska and Hawaii and other designed territories where the maximum is $765,600. This is because housing markets in these states are considered more expensive than other places in the U.S.
Any loan or mortgage higher than the local limit set by Fannie and Freddie is considered to be a jumbo mortgage or a jumbo loan.
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Qualifications for a jumbo mortgage?
Since Fannie and Freddie do not buy jumbo mortgages, lending institutions have stricter requirements and regulations for jumbo mortgages, according to Investopedia. In order to qualify for a jumbo mortgage, you must have strong financial support, excellent credit history, and credit score.
Other financial background investigations could be looked into to make sure that you will not default on the mortgage.
Jumbo mortgages also come with a higher interest rate compared to traditional loans.
