As the economy continues to improve, more and more people are taking advantage of the opportunity to get more out of their home loans. This explains the growing popularity of what is called the jumbo loan or jumbo mortgage. What is a jumbo loan? How does it work and is a jumbo mortgage right for you? Here, we'll answer all these questions and more.

What is a Jumbo Loan?

A jumbo loan may only be available to those with exceptional credit. This is because a jumbo mortgage lets the borrower take a larger loan than what the ordinary loan conforming limits will allow. The standard is a framework adhered to by Fannie Mae and Freddie Mac, setting a limit on the standard maximum value of an individual home loan package, and the parameters of a jumbo loan exceed those standards.

Fannie Mae and Freddie Mac are US companies that are authorized by the government to back or guarantee the majority of mortgages taken out in the United States. In short, they are financial service providers who work closely with the federal government on home loans. They are the industry standard, and their job is to remain within the limits of that standard, which are described by the Federal Housing Agency.

A conventional mortgage is eligible to be guaranteed, purchased, or audited by Fannie Mae or Freddie Mac. A jumbo loan, on the other hand, is larger and has higher qualifying requirements. For that reason, when you enter into a jumbo loan agreement, you will be receiving a larger loan than you normally would, and the qualifications are higher than with normal loans.

How Does a Jumbo Loan Work?

The ordinary loan limit is $647,200. If you would like to buy a home that costs more that than you will need to qualify for a jumbo mortgage. The qualifications are more stringent, but if you do qualify, and you have the ability to manage it, a jumbo loan could be a fantastic option.

These types of loans are also known as non-conforming loans because they exceed the usual perimeters of ordinary loans. If you enter into an ordinary loan, it will be backed by the FHA, Fannie Mae, or Freddie Mac. Jumbo loans do not enjoy that level of security, which is why those who take them must meet stricter qualifying standards.

A jumbo loan is an agreement between you and your financial service provider. They are not protected by government sanctioned entities in the event that the borrower defaults. More often than not, a jumbo loan will come with a fixed or adjustable interest rate.

How Much is a Jumbo Loan?

The most frequent limit on conforming loans is $647,200 but can go as high as $970,800 in some areas.

As mentioned above, those who qualify can take advantage of adjustable or fixed rates with a number of options. Jumbo loans have higher interest rates, but not drastically so. In fact, the rate increase between a jumbo and an ordinary loan is between .25 and 1%.

The most important qualifying factor is going to be the ratio of your debt compared to your income (DTI). To qualify for a jumbo mortgage, you will need a DTI of 45% or better.

How to Apply for a Jumbo Loan

To qualify, you will need a higher-than-average credit score. You will need to show a solid employment history and some savings on hand. Your debt-to-income ratio will be considered, and you'll need to make a down payment.

That done, you will gather the pertinent documents, contact your lender, and prequalify. Then, you simply wait for your application to be approved and close the deal on your new home.

Contact Direct Financial

Here at Direct Financial, we're in the business of helping young families and first-time homeowners get a foot in the door of the American Dream, securing beautiful homes in the Greater Metro Detroit area.

Our home financing professionals will work with you closely to make sure you receive the financial services you need to meet your budget and realize your goals. Get in touch today to learn more.