Jumbo Loans Explained
The jumbo loan represents a financing option, which is known to have higher limits than the ones imposed by the Federal Housing Finance Agency. Often presented as a jumbo mortgage, it is different from the conventional loans and serves specific purposes. If you are interested in acquiring a jumbo loan, you should definitely keep reading this article. In the following paragraphs, you will discover everything you might need to know on the subject, including the special considerations for jumbo loans, how does one qualify for such a mortgage, and how the rates compare to the traditional ones. When should you consider this loan? Let's find out together!
What is a jumbo loan?
As mentioned above, the jumbo loan is a financing option in which the limits set by the FHFA are exceeded. The jumbo mortgage is not the same as the conventional loan, as it comes with own particularities. For instance, it is worth mentioning that this type of loan has been designed to finance the desire for luxury property. Given that such loans are usually taken on highly competitive markets, it should come as no surprise that they come with their own requirements and tax demands.
Specialists in the mortgage industry draw attention to the fact that the value of a jumbo mortgage varies according to each state. You might even find differences between various counties, with the FHFA regulating each loan accordingly. The conforming loan limit might vary from one year to the other as well, being higher in the counties where the property values are higher. Separate provisions might be available for the areas that do not belong to the continental United States. These might include Hawaii, Alaska, Guam, and the Virgin Islands.
Borrowers must understand that applying for a jumbo loan differs from the procedure required for a conventional mortgage. The credit requirements are bound to be more rigorous and for the loan to be approved, one must meet specific terms and conditions. These might include an exceptional credit score, with a low debt-to-income ratio. It is for the best to consult a mortgage broker, as this specialist can help you determine whether such a loan is worth pursuing or not, in accordance with your individual circumstances.
As any mortgage broker or lender might inform you, jumbo loans can have different terms and conditions. You can decide both the repayment schedule and the type of interest together with the lender. Many lenders offer fixed-rate loans with a 30-year repayment schedule or adjustable-rate loans with 7-year repayment schedule. There are no governmental restrictions when it comes to how the jumbo loan might be used. Aside from primary residences, you can use the jumbo mortgage for both vacation houses and investment properties.
What are some of the special considerations for jumbo mortgages?
Before applying for a jumbo mortgage, it might be a good idea to be aware of the special considerations associated with this type of loan. As it was already mentioned above, keep in mind that a jumbo loan will always exceed the limits sets by the Federal Housing Finance Agency, being reserved for luxury properties and other types of real estate. It comes with strict credit requirements, differing from the traditional loans. Borrowers must meet the terms and conditions for this loan, especially when it comes to the credit score and debt-to-income ratio.
If you are wondering about the rigorous credit requirements, the explanation is simple. Considering that you will be taking on a jumbo loan, this means that the credit risk is significantly higher than it would be for a traditional mortgage. The lender has no guarantees from the Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corp. (FHLMC). As more money is involved, it makes sense for the level of risk to be higher as well. You might also discover that the minimum requirements for a jumbo loan have increased in the past decade. These might regard the credit score and the debt-to-income ratio.
One of the most important things is your ability to prove that you can cover the associated payments. By choosing the standard 30-year loan, with a fixed interest rate, it is highly likely that the monthly payments are going to be quite high. Both your income and cash reserves will be thoroughly investigated, with even more attention to your financial situation if you are self-employed. The lender will most likely demand both tax returns and bank statements, as well as proof of liquid assets and cash deposits. These should equal at least six months of the mortgage payment. Additional documents might be required.
Is the jumbo loan always recommended? Not necessarily. There are plenty of instances in which you should reconsider this decision, no matter how qualified you might be. If you are planning on using the jumbo loan to benefit from a significant tax break, once again, you should not take on such a loan. Keep in mind that the interest amount that can be deducted from a mortgage has decreased in the past years. The larger your mortgage, the less likely you are to benefit from a full deduction. What you need to do is analyze your financial situation from multiple points of view, making sure that you can afford the jumbo loan. Do not hesitate to pay attention to the tax benefits as well.
Is qualifying for a jumbo mortgage different?
From what has been said so far, you have probably already figured out that qualifying for a jumbo mortgage is different from taking on a traditional loan. As the lender is taking a high risk, it is clear that you will have to prove yourself as having exceptional financial circumstances. For the lender, the main goal is to be convinced that you will be able to repay your mortgage, even under dire financial circumstances. In consequence, the main requirements for jumbo loans regard your cash reserves, the low debt-to-income radio and the high credit score.
For a borrower to qualify for a jumbo loan, he or she must have a credit score that is higher than the one required for a traditional loan. Just like with the latter, the value of the credit score establishes if you are financially reliable. The lender will perceive the high score as a sign of financial responsibility. The credit report will be thoroughly analyzed, with consideration to red flags, including bankruptcy, foreclosure, and missed or late payments. The financial expert will analyze not only your credit report, but also your assets and bank statements.
The debt-to-income ratio represents another important factor that will prove your financial reliability. If the debt level is significant, especially in comparison to your monthly income, the lender might fear that you will be unable to meet the terms of your mortgage (especially if you are also dealing with financial hardship). A low debt-to-income ratio might compensate for a credit score that does not meet the satisfactory mark. On the other hand, a high debt-to-income ratio might be compensated by an exceptional credit score or the significant cash reserves.
Lenders will become interested in the cash reserves you have, asking for proof that you might be able to cover the mortgage payments with these. Of course, this depends on the loan amount, and it refers only to a specific timeframe. As a general rule, you might be asked to prove that you can cover between 6 and 12 months of mortgage payments. Keep in mind that you will have to cover the down payment and closing costs as well, provided your jumbo loan request is approved. The cash reserves should cover all of that, without doubt.
Upon applying for a jumbo loan, the lender will require certain documents, including proof of income. In addition, an appraisal will be undertaken, in order to confirm the value of the property. The documents required might include: annual tax returns (past two years), recent pay stubs, latest bank statements, profit/loss statement, balance sheet, proof of other income, etc. As for the appraisal, this is usually conducted by an experienced appraiser, being required to ensure that the property value will cover the desired jumbo loan.
To summarize, there are the main differences between jumbo and conforming loans. Aside from the size of the loan, which is obvious, you will have to be prepared for a heftier down payment with the jumbo loan. As always, it is for the best to shop around and check out the financial proposals of different lenders. The jumbo loan might have higher interest rates, but that depends on both the lender and your financial situation. Last, but not least, it is common knowledge that jumbo loans have higher closing costs and fees. Be sure to calculate your budget accordingly, before committing to any particular loan or lender.
How do jumbo rates compare to conforming rates?
Both jumbo and conventional mortgages represent financing options borrowers might consider when it comes to purchasing properties. As you have seen, borrowers must meet specific terms and conditions, including related to the credit score, income, down payment, and repayment. The difference lies in the jumbo mortgage being able to purchase expensive properties, while the conventional mortgage is more suited for the average homebuyer. Given their value and the fact that they are intended for high-priced properties, the jumbo mortgages are often described as nonconforming.
It is clear that the interest rates differ from one type of loan to the other. The interest rates for jumbo loans are significantly higher than the ones for conventional mortgages, but not as high as the used to be in the past. It might even be possible to come across jumbo rates that are more affordable than conventional ones. However, you will have to take into consideration that the jumbo loans have more strict down payment requirements. As always, if the borrower is seen as high risk by the lender, he or she will benefit from loans with higher interest rates and more substantial down payments. This is clearly connected to the high degree of risk. It is also worth mentioning that the closing costs of jumbo mortgages are usually higher.
The jumbo rates are influenced by various factors, including the credit score and the benchmarks set by the Federal Reserve, just like the conventional mortgages. Your credit profile matters tremendously, influencing the final value of the jumbo mortgage rate. It is essential to look around, as taking out a jumbo mortgage shouldn't necessarily mean that you will have to settle for higher interest rates. Check out reputable lenders who are able to guarantee competitive rates and listen to their financial proposals.
When should I use a jumbo loan?
The answer is simple. If you are interested in purchasing a high-priced or luxury property, you should definitely consider a jumbo loan. Of course, in considering this type of loan, the most important thing is that you are able to afford the higher cost. You will have to find a lender that offers jumbo mortgages and make sure you can meet the specified terms and conditions. It might be a good idea to consult a mortgage broker first, preferably one who is specialized in such loans. Together, you might be able to find the best loan option, with consideration to your particular financial circumstances.
Jumbo loan down payments
By taking on a jumbo loan, you will have to be prepared to cover the down payment. In the past, this amounted to approximately 30% of the purchase price. By comparison, the expected down payment for a conventional mortgage was around 20%. Today, however, you might be able to find jumbo loans which require a down payment that varies between 10 and 15%. You should also keep in mind that a higher down payment can be advantageous, for example, you might be able to avoid the cost of the private insurance for the said mortgage.
If you are interested in purchasing a second home or a multifamily unit, you should be ready to cover a higher down payment. Factors to influence the down payment value include the credit score and loan amount. As a general rule, you will have to offer a lower payment for a single-family unit.
For whom is the jumbo loan recommended?
The jumbo loan represents a suitable financial option for those who are high-income earners. Their income might vary between $250,000 and $500,000 per year. These are the borrowers with an excellent credit score, a low debt-to-income ratio, and the prospect of earning even more money in the foreseeable future. The established credit history looks good in the eyes of the lender, especially in comparison with the average borrower, who might be more suited for a conventional mortgage loan. It is also important to mention that such borrowers also have established retirement accounts, which means that they are financially stable from a young age.
Jumbo loan pros and cons
Before committing to any particular loan or lender, it might be a good idea to be aware of the pros and cons of a jumbo loan. Of course, one of the main benefits to be derived is that a jumbo mortgage will allow you to borrow against a significant sum of money. For savvy borrowers, the jumbo loan can represent a beneficial tool, easy to integrate within an investment strategy. Thanks to the competitive interest rates, you can take out a jumbo loan, without having to deal with the restrictions of a conforming mortgage.
Pros of getting a jumbo loan include the following
Cons of getting a jumbo loan include the following
- Opportunity to purchase luxury, high-priced properties
- Higher borrowing limits in comparison to the traditional/conforming mortgage loan
- Interest rates are competitive
- Can be used as a financial tool and integrated in an investment strategy
- Finance the desired property without the limits imposed by conforming mortgages
- Requires an exceptional credit score to qualify
- The annual income must be higher than the one required for a conventional mortgage
- Financial situation must be stellar, without bankruptcies, foreclosures, or default payments
- Borrowers must have enough cash reserves to cover between 6 and 12 months of payment
- Higher down payments might be required
Is the jumbo loan the right choice for me?
This is a question many borrowers might try to answer. The decision to take on a jumbo loan is influenced by several factors. For instance, you might be able to purchase a more expensive property, without having to deal with the restrictions of a conventional loan. One of the things you should do is research the conforming loan limits in your area. Should the property you are interest in fail to meet the conforming loan guidelines, then you might consider a jumbo loan. However, remember that jumbo loans are meant to add financial pressure on an otherwise strained situation. They are designed and recommended to those who are high earners, with a significant and stable income, not to mention the additional resources (cash reserves).
What else should I know about the jumbo loan?
Lenders perceive the jumbo loans as high risk, given the financial implications. If a borrower defaults on such a mortgage, the lender might have a hard time selling the high-priced property, losing money in the end. It is also important to remember that luxury properties are more easily influenced by market fluctuations. This is one of the reasons why a lender might require significant down payments. Such properties are not reserved for the mainstream market, with lenders often requiring more than one appraisal to ensure their value with accuracy.
Jumbo loans can be refinanced, but this option can be quite expensive, given the significant closing costs. Depending on the lender, the borrower might benefit from the extension and/or consolidation of the respective agreement. This means that one will not be forced to cover the mortgage tax again. Insurance companies might offer discount on the mortgage insurance as well, depending on the refinancing period.
As mentioned above, the lender might require that you have assets in reserve, not just cash. Their value should be able to cover the mortgage payments for a set period of time. Aside from a savings account, one might refer to other real estate or jewelry as reserves. In applying for the jumbo loan, you will need to provide the paperwork which details the assets you have. In some cases, additional documentation regarding their provenience might be required.
Frequently asked questions about jumbo loans
How much can I borrow?
Jumbo loans are known for their higher limits, but the amount you might be able to borrow is influenced by several factors, such as the credit history, debt-to-income ratio, down payment, and assets. Before applying for a jumbo loan, it is for the best to check the standard loan limit in your state.
What about the interest rate?
When it comes to jumbo loans, borrowers offer both fixed and adjustable interest rates. Your rate will be calculated in accordance with diverse factors, including the loan amount, credit qualifications, and loan-to-value. You should expect for the interest rate to be generally higher than the one of a conventional loan.
What kind of property can I buy with a jumbo loan?
As previously stated, jumbo loans are usually reserved for luxury or high-priced properties. One can buy single or multi-family units, using them as residence, second home, or personal investment.
How easy it is to obtain a jumbo mortgage?
If your credit score is stellar and you are backed by the adequate financial resources, then it is not complicated to obtain a jumbo mortgage. Keep in mind that you will have to offer proof of income and assets, while your financial situation will be thoroughly investigated. Prepare yourself for the down payment and the closing costs, as these will be part of the deal as well. The lender will most likely want confirmation that you are able to cover the mortgage payments in case of financial strain.
Can I change my mind?
As with the traditional or conventional loan, once the agreement has been signed and the loan is deemed as closed, the borrower has three days to request changes or back out of the deal altogether. However, it is recommended to read everything before the loan is closed, and make sure that you are satisfied with the respective agreement.
If you are interested in taking on a jumbo loan, you should first make sure that you are able to meet the specified terms and conditions, especially those related to your finances. You can check out the lenders in your area and their financial proposals, relying on the specialized assistance of a mortgage broker. As you have seen, there are special consideration for the jumbo mortgage, and one must be able to comply with the desired qualifications. Take your time to shop around, as with a bit of luck and patience, you will definitely come across a jumbo loan that matches your expectations.