Jumbo Loans: What Are They And How Do They Work?


One of the most important aspects of buying a home is identifying what type of mortgage is best for you. However, what if you need to get a very high-value mortgage? You may need a jumbo loan. This guide can help you decide if a jumbo loan is right for you.


What is a jumbo loan?


A jumbo loan or jumbo mortgage is a home loan that exceeds the limit set by the Federal Housing Finance Agency (FHFA). Government-sponsored companies, Fannie Mae and Freddie Mac, cannot guarantee jumbo loans, so jumbo loans pose a higher risk to lenders.


What are the limits for conforming jumbo loans?


Fannie and Freddie set limits on the maximum amount of your mortgage, which are called “conforming loan limits.” Mortgages that are below the limit have insurance that protects the lender. Jumbo loans are sometimes called “non-conforming loans” because they exceed this limit.

Conforming loan limits vary by state and market. In 2021, you can only borrow up to $ 548,250 for a single-family unit in most of the US However, conforming loan limits reach up to $ 822,375 in Alaska and Hawaii. These limits only apply to single-family units; multi-family unit limits are higher and also vary by state. If the amount of money you borrow exceeds the limit, your loan automatically becomes a jumbo loan.


Jumbo Mortgage Rates


It makes sense that lenders can charge higher interest rates on jumbo loans because, as mentioned above, jumbo loans pose a lot of risk. However, market data suggests that jumbo loan interest rates are very competitive compared to market rates. At current rates, the difference between conforming and non-conforming loans is only 0.25% to 1%. In fact, some jumbo loans have lower rates than other home loans.


How does a jumbo loan work?


Like conventional mortgages, jumbo loans are offered with different terms or repayment schedules, and can be fixed or adjustable rate loans.

However, jumbo loans do not work the same as conventional mortgages. These loans have stricter requirements than other types of mortgages, and you must meet very specific requirements for property type, down payment, credit score, and debt-to-income ratio to obtain one.

Kind of property

You can buy different types of properties with a jumbo loan. As long as you meet the other requirements of your lender, there are no government restrictions on how you can use your jumbo loan. You can use most jumbo mortgages for primary residences, second homes, vacation homes, and investment properties.

If you want a VA jumbo loan, you must meet VA property standards just like a standard VA loan. You should plan to occupy your home as your primary residence. You can’t buy a vacation home, rental property, or investment property with a VA jumbo loan. Your home must also meet VA appraisal standards. The house has to be “in good condition” before you move in. When you close the loan, a VA appraiser will evaluate the property to make sure it qualifies.

Down payment

In general, jumbo loans require higher down payments than conventional loans. Lenders typically require a 20% down payment on jumbo loans for single-family units.

However, Quicken Loans® only requires a 10% down payment for homes up to $ 1,500,000. You may also need a higher down payment for second homes, investment properties, and multi-family units.

For VA jumbo loans, it is possible to get a loan with no down payment, but only with a median FICO® score of 740 or higher. With an average score of 680 or more, the minimum down payment can be 5%. Lastly, with a median credit score of 640 or higher, you need a 10% down payment. Other lenders may have different down payment policies for VA jumbo loans.

If your title was affected, which means that you only have a portion of your loan entitlement left, the down payment rules will work a little differently.

Credit score

Your credit score is an important factor in obtaining a jumbo mortgage. The credit score is a numerical score that indicates how trustworthy you are as a borrower. It can range from 300 to 850, and several factors are evaluated to determine this.

Generally, you will need a credit score of at least 680 to get a jumbo loan for a single family unit. If you will make a 10% down payment on the purchase of a property with a loan amount of $ 1,500,000 or less, the minimum median credit score is 720.

If you are considering a rate and term refinance, the required median FICO® score is 680. You need at least 20% equity.

If you are buying an investment property, the minimum median credit score is 720 with a loan of $ 1,000,000 or 760 with a maximum loan of $ 2,000,000.

Debt to income ratio

The debt-to-income ratio (DTI) compares how much money you make to how much debt you have. To calculate your DTI ratio, divide all the required minimum monthly payments by the amount you earn before taxes. For example, if you pay $ 1,000 a month in bills and earn $ 2,000 a month before taxes, your DTI ratio is 50%: $ 1,000 divided by $ 2,000.

A low DTI ratio is very important to getting a jumbo loan because it tells lenders that you will have enough cash flow to cover your mortgage payments. Quicken Loans requires that the DTI not exceed 40% if you will make a 10% down payment on a jumbo loan. This is lower than the usual industry standard, which is 50% or less for conforming loans. If you have a down payment or higher credit score, you may qualify for a jumbo loan with a higher DTI ratio.


Special Considerations About Jumbo Mortgages


Before getting a jumbo loan, consider these factors.

Lenders may demand cash reserves

Lenders need to know that you can make regular and consistent payments on a jumbo loan. Your lender will ask you for bank statements to check if you have money in the bank to keep up with payments. Lenders often ask jumbo borrowers to hold out the equivalent of expenses for up to 18 months before they can get a loan.

Having money in your bank account is not the only way to meet the reserve requirements. Lenders can also consider up to 70% of your retirement account, so you don’t need to withdraw all of your funds to meet the reserve rule. In some cases, business and grant funds may also go toward reserve requirements.

Closing costs are higher

Closing costs typically range from 3% to 6% of the total home value, but jumbo loans have much higher closing costs than conventional mortgages. For a $ 500,000 mortgage, you may have to pay between $ 10,000 and $ 25,000 in cash at closing.

Constant income

Lenders only offer jumbo loans to buyers who have a predictable and regular income. Lenders typically ask for W-2s, tax documents, and 1099s up to 2 years old when you apply for a conventional loan. With a jumbo loan, your lender may ask you for more documentation and proof that your income is unlikely to change after taking out a loan.

Manual risk assessment

The risk of jumbo loan applications is assessed manually. A financial expert will review your credit report, assets, and bank statements in detail and uncover any past mistakes. If you have bankruptcy or foreclosure on your report, it will be more difficult for you to obtain a jumbo loan.

Financing fee to VA

According to the rules of the VA, you cannot finance loan financing fees greater than $ 510,400. As with the 25% down payment rule, you must pay a financing fee to VA prorated in cash at closing on the amount in excess of $ 510,400. You can also ask the seller to cover this part of your closing costs in cash.


Summary


Jumbo loans are large home loans that exceed the conforming limits set by Fannie Mae and Freddie Mac. These mortgages pose a higher risk than conventional or government-backed mortgages because they are uninsured. This means that if you default on a jumbo loan, the bank has to pay the bill. You can use a standard jumbo loan to buy many types of properties, although the requirements may vary by lender.

The down payment requirements for jumbo loans are usually higher than for conventional mortgages. With a VA jumbo loan, you must make a down payment of 25% of the amount that exceeds the local compliant limit. Lenders also have higher standards for DTI ratio, credit score, and cash reserves with jumbo loan applications. It is important to consider all the requirements before obtaining a jumbo loan. To review your options in detail, don’t hesitate to speak to one of our home loan experts by calling 833-326-6018.


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