Who Needs A Jumbo Loan
Buyers who dont meet the Fannie and Freddie loan limit restrictions are either expected to increase the amount of their down payment or find a lender that will offer a second mortgage for the difference so that they can get conforming loans, says Andrina Valdes, COO of Cornerstone Home Lending;in San Antonio, Texas. Otherwise, the borrower will need to seek a jumbo mortgage loan.
A jumbo mortgage is a loan designed for a borrower who needs to finance a loan balance greater than conforming loan lending limits. The operative word here is borrow or financeits not the purchase price. You might also hear a jumbo loan referred to as a non-conforming loan. That simply means the loan doesnt conform to Fannie Mae and Freddie Mac lending standards.
Jumbo mortgages can be used for primary homes, second or vacation homes or investment properties, and they are available as both adjustable- and fixed-rate loans.
How To Qualify For A Jumbo Loan
Qualifying for a jumbo loan is much more difficult than qualifying for a conforming loan. As with any mortgage, there are some hoops to jump through to secure funding for your new home.
When applying for a traditional mortgage, lenders usually prefer for your debt-to-income ratio;to be below about 40%. If youre applying;for a jumbo loan, however, you generally need to;have a lower DTI ratio. Lenders may be a bit more lenient if you have a lot of cash, though.
Jumbo loan applicants also typically need a higher FICO credit score than those applying for a conforming loan. Most lenders prefer you have a credit score around 700, though some may call for a score of at least 720.
Before starting the application process, its a good idea to have your personal financial documents in order. These include your most recent pay stubs, 1099 and W-2 forms, tax returns and bank statements.;Its critical that you have at least six months of cash ready to put toward your jumbo loan, particularly if youre an entrepreneur or you work for yourself.;Also, dont forget your mortgage preapproval checklist.
As always, it doesnt hurt to shop around and compare mortgage rates for jumbo loans. If youre looking to get one, your best bet is to check out one of the big banks;or find investors who are part of the secondary mortgage market.;There are a variety of jumbo loans to choose from, including ones with adjustable and fixed interest rates.
Bottom Line: Should I Get A Jumbo Loan
If you want a nice house in a pricey market and meet the eligibility requirements, a jumbo loan could be the right loan for you. The most important thing to remember is that jumbo loans were not created to help you push the limit of how much you can borrow. Rather, jumbo loans are available to creditworthy home buyers who want to invest in a house thats more expensive than the average house in their area.
The total loan amount that a lender will be able to lend to any borrower will be determined by their credit score, current debts, assets and a variety of other personal financial factors. The best jumbo loan lenders will always offer competitive rates and employ knowledgeable loan offers who will help you decide if a jumbo loan is the best financial move for you to make.
Michele Lerner, author of HOMEBUYING: Tough Times, First Time, Any Time, has been writing about personal finance and real estate for more than two decades. Michele writes for regional, national and international publications in print and online for a variety of audiences including consumers, real estate investors, business owners and real estate professionals.
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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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Jumbo Vs Conventional Loans Faqs
What is the difference between jumbo and conforming loans?
A conforming conventional loan adheres to the loan limits and underwriting guidelines established by the Federal Housing Finance Agency and by Fannie Mae and Freddie Mac. The conforming loan limits for 2021 for a single-family home range between $548,250 and $822,375, depending where you live.Jumbo loans exceed the conforming loan limits and can be used to purchase high-value and luxury homes. Lenders typically have higher credit score and down payment requirements for jumbo loans, and the interest rates are higher as well.
Is a conforming loan a jumbo loan?
No, a jumbo loan is not a conforming loan. Conforming loans conform to rules set by Fannie Mae and Freddie Mac and are typically easier to qualify for than jumbo loans. There are conforming loan limits that constrain the amount a lender can approve a borrower for in 2021, the limits for a single-family home are between $548,250 and $822,375.Jumbo mortgages are options for borrowers who want to buy homes above the conforming loan limits. They usually have higher credit score and down payment minimums and higher interest rates.
Is a jumbo loan better than a conforming loan?
If youre buying a home in a high-cost area or want a luxury property, you may need a jumbo loan. However, if youre looking for a relatively modest home, a conforming loan can be easier to qualify for and require less money upfront.
The Definition Of A Jumbo Mortgage
The Federal Home Loan Mortgage Corporation, or Freddie Mac, and the Federal National Mortgage Association, better known as Fannie Mae, together regulate the home mortgage industry. These two government-affiliated agencies regulate mortgage qualifications and loan limits, among other duties. Fannie Mae and Freddie Mac set limits for conforming loans that are government secured. Mortgages that fall outside conforming limits are considered jumbo loans.
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Who Is A Good Candidate For A Jumbo Loan
Typically, people who have high-earning incomes are great candidates for a jumbo loan because they can afford them. People who also have excellent credit scores and extensive credit histories are also great candidates. If you dont have millions of dollars in cash lying around, you can still get approved for a jumbo loan. If youve been regularly contributing to your retirement and investment accounts, those are also representative of your assets.
While jumbo loans are necessary, depending on the area where you want to purchase property, it all comes down to whether you can afford to keep up with the monthly payments.
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Jumbo Loan Vs Conforming Loan: Pros And Cons
The biggest question you might be asking yourself is do the risks of a jumbo loan outweigh the benefits? While jumbo loans can be a useful home financing resource, sometimes it makes more sense to aim for a property that a conforming loan would cover instead. Here are some pros and cons of jumbo loans that might make your decision easier.Pros:
- Solid investment strategy: Jumbo loans allow the investor to get a solid jump-start in the luxury real estate market, which can serve as a beneficial long-term asset.
- Escape GSE restrictions: Jumbo loan limits are set to exceed those decided by Freddie Mac and Fannie Mae, so borrowers have more flexibility regarding constraints they would deal with under a conforming loan.
- Variety in rates : Though jumbo loan rates differ from conforming loan rates in many ways, they still offer similar options for what kinds of rates you want. Both offer 30-year fixed, 15-year fixed, 5/1 adjustable, and numerous other options for rates.
Jumbo Loan Interest Rates
Generally speaking, you can expect to pay a slightly higher interest rate on a VA jumbo loan than a standard VA loan. This is because lenders take a higher risk giving you the higher loan amount. They also lose the VA guaranty on a portion of the loan, which is why you have to make a 25% down payment on the difference between the two amounts.
Lenders also base your interest rate on your other factors including your credit score and debt ratio. The fewer risky factors you provide the lender with, the less likely it is that they will hike up your interest rate.
As is the case for any loan, though, you are free to shop around with different lenders. The VA doesnt write or fund the loans. They also dont set the interest rates. Each individual lender decides what interest rate they would give you. If you dont like the rate that one lender provides, try applying with a few other lenders to see if you come up with a different rate somewhere else.
Before you assume you need a VA jumbo loan, find out the county limits for your area. You can find a list of the loan limits here. If you truly do need a jumbo loan, take your time shopping around. Also, make sure you maximize your chances of securing the best approval by improving your credit score, lowering your debt ratio, and ensuring that your income/employment is stable.
Do You Know if You Qualify?
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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.
Counseling When Getting A Jumbo Loan
Housing counseling isn’t just for borrowers in financial distress. Many HUD-approved housing counselors provide a service called pre-purchase housing counseling.
A mortgage expert will look at the terms of your offer and make certain you’re not being taken advantage of by your lender. “We’re neutral, and we can give you objective advice,” says Melinda Opperman of Springboard Nonprofit Consumer Credit Management, a California-based organization that offers counseling nationwide. The nonprofit counseling organizations are funded with money from the federal government, but you might have to pay a small fee for the services. Opperman says her organization’s charges top out at $50, a small price to pay for peace of mind – particularly in the case of jumbo mortgages. You can find a list of HUD-approved housing counselors here.
About the Author
A veteran business journalist, Jeff Ostrowski writes about money for the Palm Beach Post in Florida. Ostrowski is proud to say he knows how to use a financial calculator to amortize a mortgage.
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How Hard Is It To Get A Jumbo Loan
The jumbo market has loosened considerably in recent years, but lenders are still picky about who they give money to because they’re likely to keep your loan. Conforming loans usually are sold to Fannie and Freddie, which turn them into mortgage-backed securities, but jumbo loans are more likely to stay in the lender’s portfolio – hence the higher level of caution.
Part of the reason they’re more stringent is that they are lending their own money rather than Fannie and Freddie’s money,” says Mathew Carson, vice president at First Capital Group in San Francisco. “They definitely have guidelines that make it a bit tougher, but if you check all those boxes, it’s a relatively painless process.
Cash Reserves: What Does That Savings Account Look Like
Each lenders requirements are different, but in most cases, cash reserves are among the many things they look at when issuing jumbo loans. Most prefer to see that borrowers have enough cash on hand to cover at least a year of mortgage payments.
If youre applying for a standard 30-year fixed-rate jumbo mortgage, your monthly payments are likely going to be pretty high. Showing your lender that youre capable of handling that, even when income isnt flowing in, is a great way to stand out during the application process.
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What Is A Jumbo Mortgage Loan
Definition: A jumbo loan is one that exceeds the conforming loan limit for the county where the home is being purchased. Because it does not conform to those size restrictions, it cannot be sold to Fannie Mae or Freddie Mac via the secondary mortgage market.
Fannie Mae and Freddie Mac are the two government-sponsored enterprises, or GSEs, that buy home loans from lenders and sell them in the form of mortgage-backed securities .
These two organization have specific rules for the kinds of home loans they can purchase, and size is one of the requirements:
- When a loan meets the guidelines for GSE purchase, it is referred to as a conforming loan.
- If it exceeds the maximum conforming size limits used by Fannie and Freddie, it is considered to be a jumbo loan.
If Youre Shopping For A House And Need To Take Out A Large Mortgage You May Turn To A Jumbo Loan
A jumbo loan is a mortgage for an amount larger than the limit set by the Federal Housing Finance Agency, or FHFA. This limit is the maximum size that a mortgage can be in most parts of the U.S. to qualify for a guarantee from Fannie Mae or Freddie Mac.
Each year, the FHFA updates the guidelines that determine what size mortgages are classified as jumbo loans. In 2021, jumbo loans are typically mortgages larger than $548,250.;
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What About Refinancing A Jumbo
After youve gone through the mortgage and home buying process, it could be helpful to have information about refinancing. Some borrowers choose to refinance in order to secure a lower interest rate or more preferable loan terms.;This could be worth considering if your personal situation or mortgage interest rates have improved.
Refinancing a jumbo mortgage to a lower rate could result in substantial savings. Since the initial sum is so large, even a change of just 1 percentage point could be impactful.;Refinancing could also result in improved loan terms. For example, if you have an adjustable-rate mortgage and worry about fluctuating rates, you could refinance the loan to a fixed-rate home loan.
Jumbo Vs Conventional Loan
Jumbo loans and conventional loans are both issued by private lenders, and neither is insured by a government agency. The difference between a jumbo loan and a conventional loan is that a conventional loan meets conforming limits set by government-sponsored enterprises and jumbo loans do not. If a loan amount is larger the governments conforming limits, then it cant be securitized by Fannie Mae and Freddie Mac. Private lenders then must set their own rules and regulation in order to make a jumbo, or nonconforming, loan to borrowers.
The interest rate on a jumbo mortgage loan is usually higher than a conventional loan, though weve seen that gap close since 2010. Similarly, jumbo mortgage loans typically require a higher down payment, but some lenders are lowering their minimum down payments to be closer to that of a typical conventional or conforming loan.
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What Are Typical Jumbo Loan Requirements
Jumbo loans have different requirements compared to conforming loans. These include:
- The minimum credit score required for a jumbo loan depends on the mortgage lender, but is usually at least 700. Conforming loan credit score minimums are typically 620 or 640.
- DTI ratio When it comes to DTI, the lower the better, especially for a jumbo loan. Many lenders look for no higher than 43 percent.
- Down payment The minimum down payment on a jumbo loan also varies by lender. This is because theres less of a secondary market for jumbo loans, and more of them are held in the lenders portfolio, explains Greg McBride, CFA, Bankrate chief financial analyst. This can mean a down payment higher than the traditional 20 percent and instead be at 25 percent or 30 percent, but some lenders offer programs that have lower down payment requirements, McBride says.