Benefits Of Jumbo Loans
Why should you get a jumbo loan, anyway? You might have already realized one of the major benefits: jumbo loans let you borrow more than the limits set by Fannie and Freddie. So if youre interested in purchasing a home that requires a loan above the conventional loan limits for your area, you have an alternative option.
Jumbo loans offer a number of other advantages too, including:
- The potential for competitive interest rates
- The ability to borrow the full amount of money from one loan instead of breaking it up into two different loans
- More flexibility than conventional loans with some lenders offering more customizable mortgage solutions
Jumbo loans can also be a more comprehensive financial tool because they allow you to choose a mortgage that works best for you. They might even be a key part of your overall investment strategy, particularly if you plan to invest in real estate or want to finance rather than tie up a lot of cash in real estate.
Jumbo Loans: Key Things You Need To Know
A jumbo loan is a type of mortgage that exceeds the Federal Housing Finance Agencys limits. Use MoneyGeeks guide to learn how jumbo loans work and see if you can qualify for one.
A jumbo loan or jumbo mortgage is used to finance a high-value property. These loans are ideal for individuals who make enough to afford million-dollar properties but cannot pay in cash. A jumbo loan may be the only way to afford a home in some cities with competitive real estate markets, like New York or Los Angeles.
While jumbo loans grant you access to expensive properties, they also carry higher-than-normal payment requirements, stringent rules and unique tax implications. Its smart to learn more about jumbo loans, how they work and their requirements before considering them an option.
Key Takeaways
Jumbo loans are a financing method for high-value properties, with borrowing amounts exceeding FHAs limits.
Requirements for a jumbo loan are more stringent than traditional loans, requiring higher down payments and cash reserves along with more documentation.
Jumbo loan limits vary depending on your lender, but rates are similar to a traditional loan in that you can get fixed or adjustable rates.
Purchasing Or Refinancing Investment Properties With A Jumbo Mortgage
Jumbo loans are not limited to primary residences, making them a viable financing option for investors who want to buy or refinance their high-end properties. However, not all lenders may offer jumbo loan options for secondary or investment properties, and the ones that do could have specific requirements and loan limits. Be sure to do your research beforehand.
The Jumbo Smart loan from Rocket Mortgage® is a great example of a loan option for primary households and rental properties alike. With the Jumbo Smart loan, you can borrow up to $2 million for an investment property. If you want to purchase or refinance a vacation home, the property must be a single-family dwelling. Otherwise, rental properties can be either a single or double unit.
Similar to primary home requirements, youll need at least a 680 FICO® Score and a DTI below 45% to qualify for the Jumbo Smart loan for your investment properties and secondary homes. Requirements may be higher depending on your loan purpose. Note that only the 30-year fixed jumbo loan is available for investment properties. 15-year fixed and ARM options are only available on primary and secondary homes.
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Zillow: 2m Homes No Longer Require A Jumbo Loan
This is the result of FHA’s update to the baseline conforming loan limit in high-cost areas topping $1 million.
More than 2 million homes nationwide no longer require a jumbo loan, giving homebuyers additional inventory that is covered by a more accessible financing option, according to a new analysis by Zillow Home Loans.
The change is due to the Federal Housing Finance Agency‘s recent increase of conforming loan limits to $1,089,300 in some high-cost markets.
Zillow said the change may be welcome for buyers looking to purchase a home in the coming shopping season, as jumbo loans often come with additional fees and more stringent qualification standards, making them less affordable for many buyers.
Compared to conforming loans, jumbo loans typically require a higher credit score 700 is the minimum score many lenders accept for such loans, versus a score of 620 that many require for a conforming loan.
Bigger down payments are also the norm with a jumbo loan:
- Jumbo loans often require 20% down, although some call for even higher down payments. Some jumbo loans also will require proof of larger cash reserves than conventional loans, up to 12 months-worth.
- For the majority of the country, the conforming loan requirement increased by $79,000 going from $647,200 in 2022 to a baseline of $726,200 in 2023. In the most expensive parts of the country, equivalent to 103 counties, the conforming loan limit was raised to $1,089,300, topping the $1 million mark for the first time.
Jumbo Loan Interest Rates
In the past, because of the increased risk, jumbo loan rates have often been higher than those of conventional or government backed loans.
However, in the current market, the gap between jumbo loans and other types of loans has narrowed, and in some cases, borrowers may even find lower rates for jumbo loans than for conventional loans.
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Jumbo Home Loans After The Housing Crisis
- It was very difficult to obtain a jumbo loan after the mortgage crisis
- Because mortgage lenders became very conservative and only originated loans that could be easily resold
- At the same time the secondary market for such loans completely locked up
- But now its business as usual again and jumbo loans are readily available
For a period of time after the mortgage crisis took hold, jumbo mortgage rates were quite a bit higher than conforming rates, and it was much more difficult to obtain financing for jumbo loans than it had been.
This was mainly because the secondary market for jumbo mortgages, or really any mortgages not backed by the government or Fannie/Freddie, had simply dried up. As a result, financing those types of loans came at a premium.
Today, now that the housing market has largely recovered, jumbo loans are a lot easier to obtain and pricing is quite favorable. In fact, its possible to secure a comparable rate or even lower rate than a conforming loan.
Many investment banks offer very competitive jumbo rates to their private banking clientele that can rival conforming rates. Additionally, high net-worth individuals can take advantage of pricing specials if they have a large amount of assets with a certain depository.
In other words, dont assume a jumbo will cost more while the loan amount might be high, the mortgage rate can be quite low. And today jumbo loan requirements are quite flexible.
Find Out If A Jumbo Loan Is Right For You
Jumbo loans are for people who want to borrow more than the conforming loan limit allows. If you have a strong credit history, plenty of savings, and consistent income, qualifying for a jumbo loan could be the best way to finance your home. Either way, Better Mortgage can help you get a clearer picture of your homebuying potential and give you access to some of the most competitive rates in the industry. In as little as 3 minutes, you can get pre-approved with Better Mortgage and receive your free, no-commitment pre-approval letter. Well show you the types of loans and interest rates you qualify for so you can set your house-hunting budget.
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Who Needs A Jumbo Mortgage
If you’re financing a loan for $647,200 or more , youll probably need a jumbo mortgage. Its possible to avoid taking out a jumbo loan by increasing your down payment and lowering the loan amount. This is also a great strategy for homebuyers who want to offset a low credit score or other qualifying requirements.
Getting a jumbo loan is harder than a traditional mortgage, and youll want to talk to your lender for more information. To find out if you need a jumbo mortgage, check out Fannie Mae’s loan limit guidelines.
While Most Jumbo Loans Exist Outside Of Government Programs Eligible Borrowers May Be Able To Get A Jumbo Loan From The Us Department Of Veterans Affairs
Jumbo loans are typically only available as private loan products. The majority of government-backed programs do not allow jumbo loans. For example, United States Department of Agriculture or Federal Housing Administration loan programs have maximum loan amount limits. However, qualified veterans, active-duty service members, and certain military spouses may qualify for a jumbo loan under the Department of Veterans Affairs home loan program.
The VA loan program helps veterans and active-duty military members purchase a home. The program features a lot of perks to help make the home-buying process more affordable for veterans. Common features of VA loans include no down payment requirements, few to no closing costs, and lower borrower requirements to secure the loan. For many veterans, the VA loan program is the easiest and most affordable way to purchase a home, even if the home price is outside of conforming loan limits.
There are no specific borrowing limits to the VA loan program. However, borrowers should note that the VA doesnt do the actual lending. Instead, the VA guarantees part of the loan from private mortgage lenders. While the VA itself doesnt have borrowing limits, individual lenders may have limits for the VA loans they offer. Qualified borrowers will want to ask their lender if there are any VA loan limits before applying for a loan.
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How Much Of A Down Payment Can You Afford
The typical down payment required for an FHA loan is just 3.5%. With jumbo loans, though, it is typically required that borrowers make a down payment of at least 10% of the home’s value. Some lenders might actually require you to make a down payment of as much as 20%.
So let’s say you’re purchasing an $800,000 house and your lender requires a 10% down payment that means your down payment alone wsill be $80,000. This doesn’t even account for your closing costs, inspections, or other fees you might incur during the process. So you can see how taking on a jumbo loan can quickly get even more expensive than taking on other loans that allow for lower down payments.
To ensure you’re spending as little money upfront as possible, be sure to find out your lender’s minimum down payment amount ahead of time. Ally Bank requires a minimum of 10%. SoFi also requires a 10% minimum down payment but on top of that, this lender won’t charge Private Mortgage Insurance , which can help you save some money on your payments each month.
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Apply online for personalized rates fixed-rate and adjustable-rate mortgages included
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Types of loans
Conventional loans, HomeReady loan and Jumbo loans
What Are The Disadvantages Of A Jumbo Loan
Because this loan may come at a higher risk to the lender, it typically has slightly stricter qualification requirements than typical conforming loans that possess lower limits and the interest rate might be slightly higher to reflect the risk of lending a large amount of money to a single individual or family unit.
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Potentially Higher Interest Rates
Jumbo mortgage rates may be slightly higher than those on conforming loans, depending on the lender and your financial situation. However, many lenders can offer jumbo loan rates that are competitive with rates on conforming loans and some may even offer slightly lower rates depending on market conditions, so make sure to shop around.
How Do Jumbo Loans Work
Jumbo loans are a great option if you want to buy a home with a purchase price over the FHFAs loan limits in the propertys area. Jumbo loans are often called non-conforming loans since they dont conform to the limits set by the FHFA. Since these are non-conforming, jumbo loans cant be purchased by Fannie Mae or Freddie Mac which frees up capital to allow mortgage lenders to lend to consumers.
GETTING JUMBO FINANCING
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Purchasing A Home With A Jumbo Mortgage
Because jumbo loans are generally non-conforming, lenders are free to offer loans according to their own terms and requirements. That means they can ask for higher down payments, set higher interest rates and require higher credit scores.
Rocket Mortgage® offers the Jumbo Smart loan, so well take a look at its features as an example, not as a sample representative of the loans most lenders offer.
The Jumbo Smart loan offers loan amounts up to $2.5 million.
Benefits Of A Jumbo Smart Mortgage
There are two main benefits to a Jumbo Smart loan.
We do not require private mortgage insurance , which represents a significant monthly savings if youre unable to put 20% down on your jumbo mortgage loan.
Are There Jumbo Loan Limits
Since jumbo loans are not centrally regulated, mortgage lenders get to set their own jumbo loan limits. For example, at the time of this writing in Mar. 2022, Rocket Mortgage offered jumbo loans up to $2.5 million while loanDepot allowed jumbo loan amounts up to $3 million.
Home buyers in ultra high-cost areas hoping to buy multi-million-dollar properties will likely want to look for local mortgage lenders that specialize in high-balance jumbo loans tailored to their market.
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Who Should Take Out A Jumbo Loan
How much you can ultimately borrow depends, of course, on your assets, your credit score, and the value of the property you’re interested in buying. These mortgages are considered most appropriate for a segment of high-income earners who make between $250,000 and $500,000 a year. This segment is known as HENRY, an acronym for high earners, not rich yet. Basically, these are people who generally make a lot of money but don’t have millions in extra cash or other assets accumulatedyet.
While an individual in the HENRY segment may not have amassed the wealth to purchase an expensive new home with cash, such high-income individuals do usually have better credit scores and more extensively established than the average homebuyer seeking a conventional mortgage loan for a lower amount. They also tend to have more solidly established retirement accounts. They often have been contributing for a longer period of time than lower-income earners.
Don’t expect a big tax break on a jumbo loan. The cap on the mortgage interest deduction is limited to $750,000 for new mortgage debt.
These are just the sorts of individuals that institutions love to sign up for long-term products, partly because they often need additional wealth management services. Plus, it’s more practical for a bank to administer a single $2 million mortgage than 10 loans valued at $200,000 apiece.
Jumbo Vs Conventional Mortgages: An Overview
Jumbo mortgages and conventional mortgages are two types of financing borrowers use to purchase homes. Both loans require homeowners to meet certain eligibility requirements including minimum , income thresholds, repayment ability, and down payments. Both are also mortgages issued and underwritten by lenders in the private sector, as opposed to government agencies like the Federal Housing Administration , the U.S. Department of Veterans Affairs , or the USDA Rural Housing Service .
Though they may serve the same purposeto secure a propertythese two mortgage products have several key differences. Jumbo mortgages are used to purchase properties with steep price tagsoften those that run into the millions of dollars. Conventional mortgages, on the other hand, are smaller and more in line with the needs of the average homebuyer. They also may be purchased by a government-sponsored enterprise such as Fannie Mae or Freddie Mac.
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Your Rate Will Probably Be Higher
As with a conforming loan, your jumbo loan rate will depend on factors like your credit score, down payment, and term length. Usually, you can expect jumbo loan rates to be a little higher than conforming loan rates.
Between the relatively large principal and the higher rate, you have the potential to pay a hefty chunk in interest over the years. This doesn’t necessarily mean you shouldn’t take out a jumbo loan, but it’s something to keep in mind.
Do All Lenders Offer Jumbo Mortgages
While not all mortgage companies and lenders offer jumbo loans, many do. These include major banks, non-depository mortgage lenders, and some credit unions.
The larger loan amounts are riskier for smaller lenders and banks because the loans take longer to pay off and there may not be a large enough consumer base in their market, says DeMarkey.
Some jumbo loan lenders are more competitive than others, so it makes sense to shop around and compare offers, rates, and terms carefully, Ailion says.
Jon Meyer, licensed MLO and The Mortgage Reports loan expert, recommends working with a broker if youre in jumbo loan territory. They will have access to multiple jumbo products and will do the leg work in terms of figuring out which ones you qualify for and which you dont, he points out.
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