What Is A Jumbo Loan And How Do You Qualify For One
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If youre on the hunt for a luxury home or live in a high-cost area youre probably in jumbo loan territory and in need of financing that exceeds conforming loan limits. But before you apply, its important to understand what a jumbo loan is and how it stacks up against a conventional loan.
How Does A Jumbo Loan Work
Like conventional mortgages, you can get jumbo loans in a variety of terms or repayment schedules, and they can be fixed-rate or adjustable-rate loans. At this time, Rocket Mortgage is only offering fixed-rate jumbo loans.
However, jumbo loans work differently than conventional mortgages. These loans have stricter requirements than other types of mortgages, and youll have to meet very specific property type, down payment, credit score and debt-to-income ratio requirements to get one.
Jumbo Loan Costs: How Much Will You Pay
Another key difference between a jumbo loan and a conventional mortgage has to do with the down payment. With conventional mortgages, a 20% down payment is the minimum to avoid paying private mortgage insurance . HomeReady mortgages are available with a down payment as little as 3%.
With a jumbo mortgage loan, on the other hand, lenders want to see that you have more skin in the game and you may have fewer down payment options. So, while a 20% down payment minimum may be the standard, something to keep in mind is that your lender could require you to put down closer to 30% for a higher value home.
Aside from potentially needing more cash to cover your down payment for a jumbo loan, your lender may also want to see that you have a decent emergency cushion in the bank. Its possible that mortgage lenders may require you to have anywhere from nine to 12 months worth of cash reserves tucked away to help cover home ownership expenses before giving you the green light on a jumbo mortgage.
Closing costs should also be factored in. While a jumbo loan can have the same 3% to 6% closing costs as conventional loans, that can translate to a much higher dollar amount at closing time. For example, with a $1 million mortgage, you may be looking at $30,000 to $60,000 in closing costs alone.
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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.
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What Are The Benefits Of A Jumbo Loan
The main benefit for borrowers is that a jumbo mortgage lets you borrow more than the limits imposed by Fannie and Freddie. For instance, if youd like to borrow $1 million against a $1.5 million home, a jumbo loan makes it possible.
Some borrowers prefer to finance more of the homes cost rather than tying up cash, making the jumbo mortgage a helpful financial tool and part of an overall investment strategy. You can still get a competitive interest rate and finance the home of your choice without being restricted by the dollar limit on conforming mortgages.
Are Jumbo Loan Interest Rates Higher
Everyone wants to know about the interest rates. If the risk is higher on a jumbo loan, the rates are likely higher too, right?
They could be, but its not a necessity. When you work with a quality lender, you may secure competitive interest rates compared to conventional loans. The key is having great qualifying factors.
The lower your credit score and debt-to-income ratio, the higher your chances of securing a low-interest rate. If you have less-than-perfect qualifying factors, determine what compensating factors you may have that can offset the risk so you can secure the competitive interest rates.
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Bottom Line: What Is A Jumbo Loan
If you need a jumbo loan, shop around. Because they arent as regulated as conforming loans, see what several lenders offer.
Some may have more flexible guidelines than others, and most lenders will have varying interest rates/fees. Find the loan that suits your budget and keeps your interest rate as low as possible.
Jumbo Loan Rates Today
You might think jumbo loan rates would be much higher than conforming mortgage rates. But in fact, theyre often similarly priced.
Todays mortgage rates for a jumbo home purchase or refinance are low, just like all interest rates.
Keep in mind that jumbo loan rates, like all mortgage rates, depend on many factors. These include loan type, loan amount, down payment, credit score, debttoincome ratio, and reserves left after closing, Catlin says.
In general, Jeanette advises that jumbo mortgage rates are roughly a half percent higher than conventional rates.
Thats true if the borrower has good credit and can fully document his or her income, he explains.
But when you start to add in other factors, like poor credit, alternative income documentation, and bankruptcies, the rates will be higher.
Jumbo loan options include a fixedrate mortgage or adjustablerate mortgage.
An adjustable rate may help you save money on your mortgage payments initially, but it could be very risky to have an increasing jumbo loan rate and payment later on. So these loans generally arent recommended unless you plan to refinance or move before the initial fixedrate period ends.
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Benefits Of A Jumbo Loan
The only benefit of a jumbo loan is that one allows you to purchase a home that exceeds the mortgage limit of the region of the United States where that home is located.
If a borrower needs to borrow more than that mortgage limit, then their only option is to apply for a jumbo loan, which is not backed by the Federal Housing Finance Agency.
What Is A Jumbo Mortgage
A jumbo loan is designed for expensive, higher-end properties that exceed the loan limits of a conventional loan. The conforming loan limit is set each year by the Federal Housing Finance Agency , with most of the U.S. limited to $548,250 for the conventional home loan. When you exceed these amounts, you are now entering jumbo mortgage territory.
Once the price tag reaches certain heights, you do not qualify for the standard protections from Fannie Mae or Freddie Mac that would normally secure your loan. This is why a jumbo mortgage is also known as a non-conforming loan and can be available as either a fixed-rate or adjustable-rate loan.
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How Do Jumbo Loans Work
Banks and other private investors issue jumbo loans. Those lenders typically do not sell jumbo loans to GSEs, so they can design their own approval criteria. Every lender has unique goals and concerns, so every jumbo loan program is unique. Because of that, its smart to shop among various lenders, as you may find different pricing and approval criteria.
Find a lender that fits your financial situation and the property youre buying. For example, one lender might make getting a loan for second homes easier, while another has a higher down payment requirement.
The Benefits And Disadvantages Of A Jumbo Loan Mortgage
The benefit of securing a jumbo loan mortgage is as simple as being able to purchase and finance a home thats worth more. For borrowers who want to purchase that home on the waterfront or a larger estate, these loans become the only route to doing so unless you make a large down payment.
There are drawbacks to jumbo loan mortgages, though. They tend to be harder to obtain, requiring a larger amount of income. You also need to show proof of income, credit score, and have a larger down payment to purchase them.
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Lenders May Require Cash Reserves
Lenders need to know that you can make consistent, regular payments on a jumbo loan. Your lender will ask you for bank statements to prove that you have money in the bank to keep up with payments. Its not uncommon for lenders to ask jumbo borrowers to have up to 12 months worth of expenses in reserve before they can get a loan.
Having cash in your bank account isnt the only way to meet reserve requirements. Lenders may consider up to 70% of your retirement account as well, so you dont need to cash out all of your funds to meet the reserve rule. In some cases, business and gift funds may also go toward your reserve requirements.
Is A Jumbo Loan Right For You
If youre buying a home in an expensive market and dont have the down payment to bring your financing needs below the conventional or high-cost limit youll need jumbo financing.
Its not right for everyone since it is more expensive. Even with low-interest rates, the principal payment itself is higher than a traditional loan, so exercise caution before taking out a jumbo loan.
Make sure you can afford the payment not only today but, in the future, too. Youll likely have the mortgage for 15 30 years, so think about your future. Will you have the same income or higher? Will you go down to one income when you start a family? Do you want a mortgage that takes up a large portion of your income?
Answering these questions honestly can help you choose the right mortgage. If you decide jumbo loans are the way to go, work with a reputable lender that offers competitive interest rates, forgiving guidelines, and exceptional service. A mortgage is one of the largest personal finance decisions youll make in your lifetime so make sure its an informed decision.
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Jumbo Loan Requirements And Qualifications
- – To qualify for a jumbo mortgage loan, the borrower must have very good credit, which generally means a FICO score of 740 or higher. There are also established guidelines for income and other personal financial information.
- Financial strength – The borrower must have a debt-to-income ratio below 45% to qualify for a jumbo mortgage loan.
- Property appraisal – The property appraisal must support the purchase price for the home and the mortgage the borrower wants.
Compare your mortgage options to learn more, or contact a mortgage loan officer to find out whether a jumbo loan may be the right mortgage loan for your particular needs.
What Are The Jumbo Loan Limits For 2021
Conforming loan limits typically vary by county. The FHFA announced in December 2020 that the conforming loan limit for most counties would increase from $510,400 in 2020 to $548,250 in 2021.
In some states, counties and territories, there are higher conforming loan limits. These places are referred to as high-cost areas.
For example, Alaska, Hawaii, Guam and the U.S. Virgin Islands have a jumbo loan limit of $822,375, which is as high as the limit can possibly get for 2021. Other counties may have limits somewhere between $548,250 and $822,375. The limit in the county youre looking to move to will depend on the competitiveness of its real estate market and average home value.
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Breaking Down Jumbo Loan Qualifications
Larger loans come with increased amounts of risk for both mortgage lenders and borrowers. To ensure you can afford to take on a jumbo mortgage, qualifying guidelines are stricter than those for a traditional conforming loan. While exact underwriting requirements may depend on the lender, here are some general guidelines and questions to consider when it comes to jumbo mortgages:
What are the jumbo loan minimum down payment requirements?
In the past, lenders have usually required a 20% down payment minimum for borrowers to be approved in a jumbo loan application. However, more flexible options may be available depending on the lender you choose..
At Better Mortgage, jumbo loans are available to borrowers with down payments of just 10%. But keep in mind that 10% can be quite a chunk of change given the higher price tag of the homes. For example, a 10% down payment on the minimum jumbo loan amount is nearly $55,000.
At Better Mortgage, getting pre-approved for a Jumbo Loan is just as quick and simple as it is with any other type of loan. Similar to the process for conforming loans, pre-approval for a Jumbo Loan starts with online pre-approval: youll be asked to provide basic information about your household income, debts, and assets, and Better will run a soft credit check which wont impact your score. You can learn more about the specific product details and limits here.
What credit score do you need for a jumbo loan?
What is the jumbo loan DTI requirement?
How Jumbo Loans Work
If you need a home loan that is higher than the current limits set by the Federal Housing Finance Agency, you will need a jumbo loan. Jumbo loans are sometimes called nonconforming loans because they dont fit the loan amount requirements of conventional loans.You can check out the loan limit in your parish or county here on FHFAs website, or give us a call and we will be happy to let you know if your home purchase requires a jumbo mortgage.
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Jumbo Loan Pros And Cons
Jumbo loans exist in whats sometimes called a fragmented market, a marketplace where there isnt a single company or agency with enough power to influence the industry in any one direction. Because of this, you can see quite a difference across lenders requirements and loan amounts, for better or worse.
Down Payment On A Jumbo Loan
Fortunately, down payment requirements have loosened over the same time period. In the past, jumbo mortgage lenders often required home buyers to put up 30% of the residence’s purchase price . Now, that figure has fallen as low as 10% to 15%. As with any mortgage, there can be various advantages to making a higher down paymentamong them, to avoid the cost of the private mortgage insurance lenders require for down payments below 20%.
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Are There 5% Down Jumbo Loans
Jumbo loans have been obtained from some mortgage lenders with as little as 5 or 10 percent down. Some may need 15 to 20 percent.
Can you get a loan with 5% down?
It is a false notion that in order to get a regular loan, you have to pay a 20% interest rate, but that is not the case. In fact, you may be eligible for a regular loan with a down payment as low as 5% down payment.
Are there jumbo loans with 10% down?
Jumbo loans have been obtained from some mortgage lenders with as little as 5 or 10 percent down. Some may need 15 to 20 percent. It all depends on the loan company you work with. As we have already stated lenders are free to set their own rules for this type of loan.
What Are The Qualifications For A Jumbo Mortgage
Jumbo loans tend to have more strict underwriting rules than conventional or FHA loans due the nature of these loans. Borrowers are generally required to
- Have good credit and a lower debt-to-income ratio
- Put at least 10% down at closing
- Retain additional funds in reserve after closing. The amount of reserves required may vary depending on credit scores and other factors.
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You’ll Need A Lower Debt
Your debt-to-income ratio is the monthly amount you pay toward debts divided by your gross monthly income. For example, if you spend $2,000 per month on your mortgage and student loan payments, and you earn $3,000 per month, your debt-to-income ratio is $2,000 divided by $3,000, or 66%.
Your exact required debt-to-income ratio depends on your lender. The company will likely require a lower ratio for a jumbo loan than a conforming loan. Most ask for a ratio of around 40%, give or take a couple percentage points.
A lower ratio means you owe significantly less than you earn, leading lenders to believe you can afford the high payments that accompany a jumbo loan.