Jumbo loans are those which exceed the conforming loan limits as set out by Fannie Mae (the Government Sponsored Enterprise) which purchases most loans on the market.
The Fannie Mae agency in conjunction with the Federal Housing Finance Agency set the loan limits per county across the country based on median income limits.
These loan amount maximums cannot be exceeded and deemed a loan covered by Fannie Mae.
There is quite a large market for property whereby the necessary loan amount exceeds these ceilings and therefore the jumbo market, which is comprised of big banks and private lenders, has stepped in to absorb this demand.
Jumbo loans typically have to adhere to more strict underwriting standards for down payment, credit profile , income and assets.
Because these loans are not guaranteed to be purchased by Fannie Mae, they must be underwritten very carefully against set out guidelines.
The investor appetite for these loans is strong, however, they only want the cream of the crop.
High credit scores, strong income, lots of assets and a sizeable down payment (10% or more). in return, these highly qualified buyers receive excellent terms and rates.
Some of the benefits of these jumbo loans allow a prospective buyer to qualify for a home that is way beyond the maximum limit set forth in the conventional guidelines by Fannie Mae.
Excellent borrower profiles receive excellent terms. Interest only is available, as well as adjustable rate mortgages.
These two features can make that $1 million mortgage much more affordable and even though these are the cream of the crop borrowers, it is nice to have that type of option available.
Another benefit of these jumbo loans is that they do allow for gift funds to be given for the down payment.
Often times, because these loans have strict down payment criteria, a borrower may have most of the funds but not all and yet the borrower may have strong credit and income as a compensating factor.
So, most underwriting guidelines will allow a gift from a family member in the form of funds for down payment to be brought to the closing table to help close the transaction.
Low rates and high loan amounts are the tenets of these jumbo loans which are typically provided for by big banks and large institutional investors looking for excellent borrowers.