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.
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