What Is A Jumbo Loan?
People often have questions about what types of mortgages are available to them, especially what is a jumbo loan? A jumbo loan is one of many different types of home loans and it is different from a conventional mortgage. It is important to consider all of your financing options, including jumbo loans, when buying a house.
How Much is a Jumbo Loan?
A jumbo loan, unlike other mortgages, exceeds the limits set by the Federal Housing Finance Agency (FHFA). The FHFA sets limits on the total amount that can be borrowed. This limit is set annually, but it does not change that much year on year. A jumbo loan is a mortgage that exceeds this limit, allowing you to borrow more. Consequently, there are different underwriting rules and tax implications. So, the short answer to the question of what is a jumbo loan is that it’s a loan that lets you buy more expensive properties. It cannot be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac. The value of jumbo loans is different in every state and sometimes, the county.
Jumbo loans generally cannot be used to purchase a HomePath or HomeSteps property as these properties are geared towards conforming loan programs.
How Does this Work?
Now that we have answered the question of what a jumbo loan is, we can look at how they work. If you want to obtain a loan that is more than $726,200 you may need a jumbo loan. You will be subjected to potentially stricter credit requirements than you would with a traditional mortgage. You are borrowing more money so, as a result, there is a higher level of risk. Therefore, lenders have more rigorous minimum requirements as these loans are not sold back to the government, rather than to investors. Although they differ from standard mortgages, jumbo loans must meet the requirements of a qualified mortgageand usually they are stricter since it is a higher loan amount.
You should have an excellent credit score in order to get a jumbo mortgage. Your debt-to-income ratio should also be very low. Ideally, depending on the lender, it should be below 45% and closer to 36%, if possible. Additionally, lenders will require you to prove that you have easily accessible cash to cover your expenses. All borrowers must provide at least 30 days worth of pay stubs and W2’s. The requirements are generally stricter if you are self-employed. If you are self-employed, a year-to-date profit and loss along with tax returns going back at least two years. It would be ideal to show liquid assets at least equal to six months of the mortgage payments.
What is the Interest Rate Like?
Jumbo loan interest rates can vary, usually they are higher than traditional loans. The average interest rate for a jumbo loan at times can be on par with traditional mortgages and, in some cases, even lower, so it really depends on various factors.
What LTV?
Similarly, down payments on jumbo loans are decreasing too. Lenders traditionally asked buyers to put down a larger payment for a jumbo loan. However, they are now willing to accept a smaller down payment, similar in size to that needed for a traditional mortgage. That said, there are still benefits to saving a larger down payment. Putting in more upfront will reduce monthly costs and can reduce interest rates. Additionally, it will increase your chances of securing a jumbo mortgage.
Dream Home
If you are wondering what a jumbo loan is useful for, it all depends on the type of home you want to buy. In situations where your dream home is expensive and you need to borrow more than the FHFA limit, a jumbo loan is the best option. They are most appropriate for high-earners that can demonstrate they have the capital to comfortably pay the mortgage. This group is often referred to as high earners. This means that they have high income and have the savings to buy an expensive property such as one in Miami Dade County. You should also consider the strength of your retirement accounts. People that take out jumbo loans tend to have larger retirement savings accounts as they have saved for the larger home.
Jumbo loans have a lot of benefits and they are ideal in situations where the FHFA limits restrict your borrowing power. However, borrowing a large amount of money always brings risks with it. Homebuyers should speak with MortgageQuote.com to weigh up the benefits and drawbacks before making a decision.