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Meeting Jumbo Loans Requirements For Your Home Mortgage
By EchoBay Loans Staff Writer

Jumbo loans, also known as nonconforming loans, are loans that exceed the conforming loan limit that is set by Congress each year. The home mortgages that fall into this category are not eligible for purchase by the Federal National Mortgage Association (also known as Fannie Mae) or the Federal Home Loan Mortgage Corporation (also known as Freddie Mac). Sound confusing? It's not nearly as complicated as it initially sounds. Basically, if a mortgage on a single-family home or other qualifying real estate purchase exceeds a set dollar amount, that mortgage falls under the jumbo loan requirements.

If you are wondering why Freddie Mac and Fannie Mae are such important names in the mortgage industry, it will help to understand exactly who these companies are and what it is that they do.
These two companies are the organizations that provide lenders with most of the money that they need to fund the home loans that they make. These companies do this by purchasing these loans from the lenders and then holding them in the company's portfolio.

The funds the lenders receive from these companies are then used by the lenders to create more mortgages, and the cycle continues. Because mortgages that exceed the conforming limits cannot be funded by these two companies, the interest rates associated with these loans are generally higher and the loans tend to be harder to get as the restrictions and income requirements increase.

The conforming loan limit amount changes every year, just as the cost of housing does. For the year 2004 the limits for first mortgages are set at $333,700 for single-family homes, $427,150 for two-family loans, $516,300 for three-family loans and $641,650 for four-family loans. For second mortgages the limit is set at $166,850. These limits apply to all states except for Alaska, Hawaii, Guam, and the U.S. Virgin Islands, where the loan limits are 50 percent higher. Considering the housing cost in some parts of the country, it's not surprising to find out that jumbo loans are no longer exclusively for the rich and famous. A lot of middle-income consumers are also beginning to utilize the increased spending power offered by this type of home loan.

The requirements for jumbo loans are similar to the requirements of a conforming loan. Applicants generally need to have a credit score of 620 or higher to qualify; and if you don't have the jumbo income to go along with the purchase you're making, you probably won't meet the lender requirements. Besides income and credit history, some of the other requirements will include a property appraisal, a survey, and the financial statements that are normally required when applying for a conforming loan.

When applying for jumbo loans, another requirement that you consumers need to meet is a proper debt-to-income ratio. Even if you have the income that would allow you to make the mortgage payments on a jumbo loan, lenders also want to make sure that there isn't a lot of debt already sucking up a good percentage of that income. Traditionally, lenders are looking for a debt-to-ratio income of approximately 28/36. This means that the total amount of your monthly housing expense, divided by your monthly gross income does not exceed 28 and that your total monthly expenses, including housing, debts and other financial obligations, divided by your monthly gross income does not exceed 36.

For example, if your monthly income was $6,000, your monthly expenses excluding your housing expenses were $600, and your monthly housing expenses would be $1,800 if you were approved for the loan, your debt-to-income ratio would be 30/40. While that ratio is slightly higher than the ideal debt-to-income ratio, you could still possibly qualify for a jumbo loan depending on your credit history and the specific lender you are working with.

If your income, your credit, and your debt-to-income ratio all paint a solid financial picture, it is possible that you may qualify for a jumbo loan with as little as a five percent down payment. Like a conforming loan, these nonconforming loans can be either fixed-rate or adjustable-rate mortgages. The lengths of jumbo loans also vary, but are generally the typical 15-year or 30-year terms as seen with the conforming loan types. The interest rate you pay will be higher than the interest rate on a conforming loan would be, but how much higher will depend on the financial market and other outside factors.

If you are shopping for a new home and you don't have enough of a down payment to bring your mortgage into the realm of conforming loans, but your income enables you to afford higher-than-average monthly housing expenses, then jumbo loans can be exactly what you need to get into the home of your dreams.

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