As implied by the name, a Jumbo loan is a type of loan that covers an amount larger than a normal loan. This loan is suitable for financing vacation homes, investment properties, as well as primary homes. Click here to find out more about jumbo loans.
Depending on the location and the lender, the maximum size of a jumbo loan can vary. Since the jumbo loans market is smaller than normal loans, you may have to shop for a jumbo mortgage loan a bit more.
Apart from these limitations, jumbo loans do not differ from traditional mortgage loans by much. Details such as payment schedules are normally similar. Individuals seeking jumbo loans have a variety of options, from adjustable to fixed-rate jumbo mortgages. As of mid-December 2020, mortgage rates for other loans were significantly lower than those for jumbo loans, about one-half of 1 percent or 50 basis points on average.
How Does It work?
If you want to purchase a property whose price range is about $500,000 or more – and you do not have much cash in your bank account – then a jumbo loan might be suitable for you.
However, landing a jumbo loan is no easy task as you will need more credentials than individuals seeking a conventional loan. This is because Freddie Mac or Fannie Mae does not guarantee your loan, leaving more credit risk for your lender. Besides, since a jumbo loan involves a lot of money, there is more risk.
Since 2008, a jumbo loan’s minimum requirements have become stricter, just like traditional mortgages. You will need a very low debt-to-income (DTI) ratio and a stellar credit score of not below 700. The debt-to-income ratio must be below 43%, and preferably, it must be closer to 36%.
Jumbo loans must fall within the “qualified mortgage” guidelines stipulated by the Consumer Financial Protection Bureau. A “qualified mortgage” is a system of lending that has standardized rules and terms, for instance, the 43% DTI.
An applicant must prove that they have accessible cash on hand that will cover payments. If you choose a standard fixed-rate mortgage of 30 years, the charges will most likely be very high. Reserves and specific income levels depend on the loan’s overall size. However, all borrowers require 30 days of W2 tax forms and pay stubs stretching back two years.
There are greater income requirements for self-employed individuals: at least 60 days of current bank statements and two years of tax returns. You must also provide cash reserves equal to half a year of mortgage payments and liquid assets to qualify. Furthermore, every applicant must prove ownership of non-liquid assets (such as other real estate) and proper documentation on any other loan they hold.
Jumbo Loan Rates
Since jumbo mortgage rates are prone to fluctuation, conforming mortgage rates can be lower or higher than jumbo mortgage rates. For example, according to Bankrate’s national survey of lenders, as of mid-December 2020, the conventional 30-year fixed rate was 2.96%, while the average 30-year jumbo rate was 3.42%.
Jumbo Loan Down Payment
In the past, jumbo loan borrowers were required to put down a down payment of 30% (compared to 20% for conventional mortgages). Fortunately, over the past few years, the requirements of jumbo loan down payments have become less strict, and the percentage has fallen to between 10-15%. The advantage of putting down a higher down payment is evading the private mortgage insurance cost you must pay if you put down less than 20% of the home’s purchase price.
Jumbo Loan Limits
For borrowers whose loan amount is limited by their location, a jumbo loan is suitable. In 2021, the limit for Freddie Mac and Fannie Mae’s conforming loans is $548,250 for most parts of the country. Nevertheless, expensive areas have higher loan limits. The loan limit for much of D.C., Washington, New York, Hawaii, Alaska, California, and metro areas is $822,375.
The Benefits of a Jumbo Loan
A significant benefit of jumbo mortgage loans is that you can borrow more than the limits imposed by Freddie Mac and Fannie Mae. For example, a jumbo loan makes it possible to borrow a $1.2 million loan against a $1.4 million home.
Rather than tying up cash, other borrowers opt to finance more of the property’s cost, which makes a jumbo loan a useful investment strategy and financial tool. With a jumbo loan, it is possible to finance a property and get a competitive interest rate without conforming to mortgages by the dollar limit.
As we have seen above, jumbo loans exceed the limits set by the Federal Housing Finance Energy. They are suitable for individuals who need more financing that goes beyond these limits.
