‘Jumbo loans.’ It’s a term we hear frequently and see advertised regularly. But what exactly is a jumbo loan, and how did ‘jumbos’ come to be?
The world of home loans -- including co-op and condo mortgages -- has changed and evolved in the past few decades. Prior to the Savings and Loan crisis of the 1980s and 1990s, home loans were originated by banks and held ‘in portfolio,’ as an asset. That meant if you took a loan with, say, the New York Community Bank, Apple Bank, or Citibank, the mortgage was held and administered by that bank until such time as it was paid off through either the sale of the property or the loan’s final amortizing payment.
The Savings and Loan crisis changed all that. Out of the ashes of that traditional lending infrastructure arose the practice of mass securitization--the origination, packaging and sale of blocks of loans on what’s known as the secondary market. One of the main purchasers of these loans is the Federal National Mortgage Association (FNMA, a.k.a., Fannie Mae). Founded during the Great Depression, FNMA does not originate loans or provide loans to borrowers. Rather, it acts as a marketplace for the sale of previously originated loans, which helps member banks maintain liquidity and continue lending.
The main distinguishing factor of a jumbo loan, explains Robbie Gendels, a senior loan officer at National Cooperative Bank (NCB) -- a national lender on both individual co-op and condo units, and of underlying permanent mortgages for co-op buildings -- is its size. “A jumbo doesn’t meet FNMA guidelines with respect to size. It exceeds FNMA’s limits. It can’t be purchased, guaranteed, or securitized by FNMA.” The dollar limit for a mortgage to be accepted by FNMA stands at $626,525.
So are jumbo mortgages treated differently than conventional loans? Not substantially, explains Gendels. “Terms and underwriting may vary from bank to bank,” she says. “Credit score requirements are usually a little higher, in the 700-750 range, and down payment requirements may be slightly higher as well. It depends on the bank, some may ask for 10 percent down, others 20 percent. Terms such as the length of the loan, interest rate, and amortization schedules, tend to be consistent with smaller loans that qualify for FNMA purchase.” What’s available in terms of loan structure will also depend on what product the particular bank offers, fixed rate, adjustable rate mortgage (ARM) or other products.