While some homebuyers might opt to purchase a property outright in cash, almost everyone finances the purchase by obtaining a mortgage from a lender.

One of the most important aspects of looking for your new home is determining what type of mortgage is right for you. However, if you need to take out a very high-value mortgage, the process is a bit different than getting a conventional loan.

If you’re trying to buy the house of your dreams, it’s possible that you will need a jumbo loan to finance the purchase.

What are jumbo loans, and how do they work? Let’s take a look at everything you need to know.

What Is a Jumbo Loan?

You might also hear jumbo loans referred to as Jumbo mortgages. This is a specific type of financing that exceeds the Federal Housing Finance Agency (FHFA) conforming loan limit.

While conventional mortgages are eligible to be guaranteed, purchased, or securitized by Freddie Mac or Fannie Mae, Jumbo loans are not. This type of loan was created in order to help people finance luxury homes and properties in local real estate markets that are highly competitive.

There are unique tax implications and underwriting requirements that come along with Jumbo mortgages. After the real estate market has recovered after the 2008 housing crisis, these kinds of mortgages have become increasingly popular.

The conforming loan limit size set by the FHFA does not change frequently but is set on an annual basis. Depending on the area of the state and even the county, the limits can differ.

How Do Jumbo Loans Work?

Is the house that you are dreaming about priced somewhere near $575,000 or more? If you don’t have that kind of money lying around, you are most likely going to need a jumbo loan.

There are more rigorous credit requirements for taking out a jumbo loan than there are for taking out a conventional mortgage. The reason for this is that jumbo loans carry more credit risk for the lender both because of how much money is involved and also because the loans are not guaranteed by Freddie Mac or Fannie Mae.

There are minimum requirements that you will have to meet in order to qualify for a jumbo loan. In the next section, we will take a look at what you will need in order to be eligible.

How Do You Qualify For a Jumbo Loan?

Debt-to-Income Ratio

One thing that will be considered by potential lenders is your debt to income ratio (DTI). The reason why this is important is that they want to make sure that you do not become over-leveraged. If you have plentiful cash reserves, however, they might be more flexible.

Credit Score

Different lenders will have different requirements when it comes to your credit score. Some might need you to have a credit score of over 720, while others might simply need it to be over 680.

Documentation

You will need to be able to prove the health of your finances to any lender for jumbo loans in MI. This will require extensive documentation. You should be ready to provide bank statements, your full tax returns, 1099s, W-2s, and any investment account information.

Cash Reserves

If you have quite a bit of money in the bank, you have a better chance of being approved for a jumbo loan. Sometimes, a lender might ask you to prove that you have enough cash that you could cover several months, to one full year of the mortgage payment with your cash reserves alone.

Appraisals

A second home appraisal might be required for the property that you are trying to buy. This isn’t always the case, but you should be prepared for the possibility.

Jumbo Loan Rates

It used to be the case that jumbo loans had higher interest rates than conventional loans. However, the difference in interest rates has been getting smaller in recent years.

Down Payment on a Jumbo Loan

Down payment requirements have also gotten slightly less strict in the last several years for jumbo loans. In the past, lenders often required that buyers put down 30% of the purchase price as a down payment.

These days, you might be able to get a jumbo loan with a downpayment of as low as 10 or 15% of the purchase price. Jumbo loans are similar to other mortgages and that there are benefits to making a higher down payment. Some loans will not have mortgage insurance, even with less than 20% down. 

Who Should Take Out a Jumbo Loan?

Jumbo loans are typically considered to be most appropriate for high-income earners that make somewhere above $200,000 or more of income every year. This segment of the population is sometimes known by the acronym HENRY, which stands for “high earners, not rich yet.” In short, these are individuals who have high income but have not yet accumulated a lot of other assets or millions of dollars in the bank.

This segment of the population typically has more established credit histories and better credit scores than the average home buyer. They also commonly have retirement accounts that are more solidly established.

Are You Shopping For a Jumbo Loan?

Obtaining financing is one of the most important steps of the home buying process. When you are shopping around for jumbo loans in Michigan, you want to make sure that you are working with a lender that can get you the fastest closing and serve you the best.

Are you looking around at the options for jumbo loans? If so, click here to start the loan application process today.

If you’re wondering what the difference between a jumbo vs conventional mortgage is, you’ve come to the right place. We’ve rounded up the pros and cons of each and the key differences between the two.

Choosing the right mortgage could be the difference between saving money on interest and better loan terms. Whether you’re searching for a million-dollar home or a $200,000 home, your mortgage will look different.

This is why it’s helpful to understand the differences between the two loans. From the lending requirements to the home prices, think of this as your go-to guide to jumbo and conventional mortgages.

What Is a Jumbo Loan?

A jumbo mortgage is a loan taken out to finance a home. The key difference with a jumbo loan is that they are typically used for higher-priced or luxury real estate. In high-demand markets, for example, where real estate is at a premium, homeowners often use jumbo loans.

A jumbo loan is considered non-conforming. That means that a jumbo loan isn’t backed by Freddie Mac or Fannie Mae. They are outside of the Federal Housing Finance Agency’s (FHFA) loan restrictions.

Another key difference between a jumbo loan and a conventional loan is the loan terms. You’ll typically see much stricter loan requirements for a jumbo loan. This is because the monthly payments are typically higher than with a conventional loan.

Qualifying for a Jumbo Loan

To make sure a buyer can keep up with the high mortgage payments, your lender will need to see excellent credit, high income, and a low debt-to-income ratio. Your debt to income ratio is the amount of debt you have compared to the income you have coming in.

In terms of down payments and interest rates, the gap between the two types of mortgages isn’t as drastic as it once was. It’s not uncommon to see similar down payments and interest rates between the two mortgages.

Your specific down payment requirements and the loan terms you’re given will depend on your own unique financial situation. Typically, the better your credit, the lower your interest rate will be regardless of the type of loan you choose.

Conventional Mortgage

As with a jumbo loan, you’ll need a down payment and a minimum credit score to qualify for a conventional mortgage. You’ll also need to meet certain income requirements. The lower your debt-to-income ratio, the better your loan terms are as well.

As mentioned above, jumbo loans are considered non-conforming. A conventional loan can be either non-conforming or conforming. A conforming loan must follow loan limits set through the FHFA.

These limits change each year to keep up with inflation and the average home price in the United States. For 2021, the maximum you can borrow for a conventional conforming loan is $548,250. This is for a single-family home.

The limit is also different depending on the county you live in. If you live in New York City or Nantucket for example, where real estate is expensive, you can go as high as $822,375 using a conventional mortgage.

Weighing the Pros and Cons

When you’re applying for a loan, you’ll want to weigh the pros and cons of a conventional mortgage and a jumbo loan. One advantage to a jumbo loan is that they tend to cost less. With higher down payments, a higher income, and a lower interest rate, you’ll pay less for your mortgage over time.

Because a jumbo loan isn’t backed by the Federal Government, however, your credit and finances will need to be impeccable. Lenders are assuming all the risk with a jumbo loan. That means you’ll face stiffer loan requirements.

When it comes to a conventional loan, you’ll see lower credit requirements. You can also qualify for an FHA loan with less money down. There are more programs available for first-time homebuyers, USDA loans, VA loans, and HUD loan programs.

Applying for a Loan

Whichever loan you apply for, you’ll need to have a few key documents handy. First, expect to be asked for two years’ worth of tax returns, and W2’s You’ll also need your most recent paystubs. You should also have your estimated down payment.

Before you apply, it’s also helpful to write out your income and expenses. This can help you gauge affordability and see where you can make some cuts. A good rule of thumb is to keep your housing expenses to a third of your income.

Your credit will be pulled, so it’s always a good idea to run it yourself before you apply. You can see where you can improve and if there’s anything you’d like to dispute on your report. You can run your credit for free each year from the Federal Trade Commission.

Take some time while you search for a home to pay down your debt. Lowering your debt will open up more loan options and better terms. Don’t close any credit cards to keep your credit availability high.

Jumbo vs Conventional Mortgage

If you’re considering a jumbo vs conventional mortgage, there are a few major differences to keep in mind. First, look at the price of the home you’re buying and how expensive your housing market is. Next, weigh your down payment, income, and credit.

When you’re ready to get started, we have mortgage professionals waiting to assist. Fill out the application form here to kick-start your mortgage. We’ll help you find the best mortgage for your new home.

Are you considering a million-dollar dream home? If so, consider a jumbo loan to finance your luxury home.

What is a jumbo loan? 

A jumbo loan is a mortgage with a higher borrowing limit than conforming loans. Jumbo loans can be fixed or variable loans. The states have different conforming loan limits. A loan that crosses the conforming limit qualifies as a jumbo loan.  

From the lender’s perspective, jumbo loans are riskier than standard mortgages due to the higher limits involved. On the borrower’s end, they have to meet the tougher standards to get approval. In some cases, however, jumbo loans are more advantageous than conventional mortgages.

This article will provide an in-depth view of jumbo loans. Read further to know more. 

What’s the Difference Between a Jumbo Loan and a Conventional Loan?

The primary difference is the price tag on each home. Jumbo loan borrowers typically use the loans to purchase homes in the millions of dollars. Conversely, a standard mortgage applies to borrowers who intend to buy an average-priced home.

Further, jumbo loan borrowers are typically in a higher income bracket, and lenders will only consider applicants with a higher income. Homeowners need a substantial income to keep up with higher payments. 

Who Needs a Jumbo Loan? 

A jumbo loan is necessary if you want to buy an expensive home without using too much cash down. In most cases, potential homeowners need a jumbo loan for homes typically priced at $600K and above. In addition to high income, borrowers must meet other requirements. 

How Can I Qualify For a Jumbo Mortgage?

Jumbo loans are niche loans because not many potential homeowners qualify. Lenders impose stricter limits because they’re loaning more money to consumers.

Moreover, jumbo financing isn’t secured or purchased by Fannie Mae or Freddie Mac. This is because jumbo loans exceed limits set by the Federal Housing Finance Agency.

Under normal circumstances, lenders are more willing to approve borrowers if the loan has federal backing. Without a guarantee, jumbo loans remain out of reach for many homeowners. 

Additionally, lenders have mandated tougher standards since the 2008 economic crisis. However, jumbo loans have made a resurgence in recent years as the economy recovered. 

The problem is that the stringent requirements have remained in place. Overall, the lending standards depend on the institution, but the following parameters are a general guideline:

• Credit Score: In most cases, you’ll need a minimum 680 credit score on a loan up to $1 million. Homes between $1 to $1.5 million may require a minimum 700 score. Second homes may require scores above 680. 
• Low DTI: You need to minimize your debt as much as possible to qualify. Lenders will see high debts as a red flag. Try to keep debts between 38% to 43%. 
• Stable Income: Only borrowers with a stable income will qualify. Lenders will ask for two years of W-2s, 1099s, and tax returns. You may also need to submit additional income documentation. 

What About the Down Payments?

Some lenders may permit a lower down payment. For instance, you can get a jumbo loan for a down payment between 10% to 15%. In most cases, however, you may have to pay 20% or more. 

Jumbo loans also depend on what type of home you’re getting. For example, you may have to pay a higher down payment if you’re financing a second home or a multi-family home.

• Note: In addition to cash payments, lenders may ask for a cash reserve of up to 12 months. Lenders may impose cash reserves if you default on the loan. On the other hand, you can increase your chance of approval if you set aside 12 months of payments ahead of time. 

Additionally, you may get into a jumbo loan if you have a minimum score of 640 or above. With a minimum 640 score, the down payment could only be 10%.

If you have a VA loan, however, you may not have to pay a down payment at all. In other cases, veterans may only have to pay 5% if they have a score that’s 640 or more. 

How High Are Jumbo Loan Interest Rates?

Mortgage rates for jumbo loans may be higher than conventional mortgages. The high rate stems from the lender’s risk of providing large loans to buyers.

In recent years, however, interest rates on jumbo loans are more competitive. In some cases, jumbo loans offer lower rates than conventional mortgages. 

How High Are the Closing Costs? 

In many cases, the costs can be fairly high. For instance, lenders may require a second appraisal to confirm the home’s value. Due to the high amount of money involved, lenders want to be more cautious. As a result, lenders may pass on the cost of an additional appraisal to you. 

Where Can I Find Jumbo Loans?

Most likely, you won’t find loans at smaller credit unions or banks. Large institutions have enough capital to lend higher amounts to borrowers. Regardless of the institution, shop with a mortgage broker, as they may be aware of options you cannot find on your own.

What Is A Jumbo Loan?

If you’re wondering, “What is a jumbo loan?”, it’s a mortgage that surpasses traditional lending limitations. Borrowers use the money to purchase high-end properties.

These homes can range from $600K and up. However, most borrowers don’t qualify for jumbo financing. Additionally, buyers must adhere to tougher standards, such as a high credit score, a lower DTI, and a high income. 

Are you wondering how to choose a mortgage that’s best for you? Click here to learn more.