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?
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.
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.
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.
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.
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.