Going by the word literally, jumbo loans could spark either hope in a struggler who has dreams or fear in the worst of financial defaulters. A jumbo loan is also called a jumbo mortgage. It is a form of housing finance for which the loan amount is greater than the limits set by the Federal Housing Finance Agency. Hence, it doesn’t qualify to be purchased or securitized.

Jumbo loans are used to a massive extent in financing luxury homes and properties in extremely competitive real estate markets.

If you have the desire of buying a house that costs more than a half a million dollars, but you don’t have that much money in your bank account, then purchasing a jumbo loan could be for you. However, they carry a huge credit risk for the lender. As a result, the borrower will need to pay heed to more credit requirements as compared to if he or she was purchasing a normal loan.

For a jumbo loan to get approved, a credit score of 700 or more, which is incredibly reliable, and a debt-to-income ratio that is way below 43%, is a must to have. The loan must fall within the rules of the Consumer Financial Protection Bureau. If you go for a 30-year old fixed mortgage, for instance, you will have to prove to the lender that you have cash in hand that you get access to easily to pay your jumbo mortgage. He or she needs to have liquid assets to qualify and cash reserves that are equivalent to 6 months of mortgage payments.

There are some positive aspects of jumbo loans as well. The gap between interest rates offered by jumbo loans and conventional loans has reduced to a huge extent in recent years. They are often securitized by other financial institutions since these carry more risk. Down payment guidelines have also been loosened as well around this time. Earlier, lenders would ask borrowers to put up as much as 30 percent of the property’s purchase value. That figure now ranges between 10-15 percent, compared to 20 percent on the conventional loan.

Banks do aim to offer more customers with jumbo loans. They believe that their clients would be high-net-worth individuals or institutions with an excellent credit score and with many assets. Going one step further, jumbo loans can often be thought of by relationship managers of banks as an excuse to tempt clients into procuring extra wealth management and investment services in the future.

Generally, jumbo loans are taken by people who have a high amount of income, but not so much that they can be considered rich. Thus, a figure between $250000 and $500000 would suffice as their annual income. However, even if you are qualified enough to take it, you would want to consider and compare the prospect of taking two smaller, conventional loans and one big jumbo loan depending on their eventual profitability.