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 Mortgage
Not everyone that wants a jumbo loan can get one.
Jumbo mortgages are difficult to procure because not every lender offers them. The bigger the loan, the longer it takes to pay off, and the extended timeline presents more risk than most lenders allow. It is still possible to get a jumbo loan, but your interest rates will be higher than the traditional home mortgage, and it could be extremely difficult even to qualify.
Lynch gives us an exclusive inside look at PCMAs average client for a jumbo mortgage.
- Loan Amount: $1,004,302.89
- Co-Borrower Age: 59
- Years in Home: 16
Lenders look for a higher credit score for jumbo loans than they do for a conventional mortgage. Your debt-to-income ratio is also important, and lenders tend to prefer anywhere from 43% to as low as 36%.
The higher loan amount of a jumbo mortgage can make some banks uneasy, so to quell anxious nerves, they may ask for proof of reserve funds, such as savings or jewelry. This can go a long way in proving to a lender you are capable of repaying your loan.
The down payment is larger, too. Many lenders will accept as little as 3% for an average home loan, even though personal finance experts typically recommend aiming for 20%. On jumbo mortgages, lenders will look for anywhere from 15% to 30% down on loans. Additional appraisals may also be required.
When Should I Use A Jumbo Mortgage
Youd use a jumbo mortgage when youre seeking a loan amount thats greater than the conforming loan limit in your area. In most of the country, that means youll use a jumbo mortgage if your loan amount is greater than $548,250.
In certain areas that are deemed high cost, the conforming loan limits go above $548,250, and you have to look up your areas loan limits to know exactly. The FHFA site has this information.
Certain lenders will categorize anything above $548,250 as a jumbo, even if the loan is being made in a high-cost area where the conforming limit goes as high as $822,375.
But dont assume this applies if youre in an area where your conforming limit goes above $548,250. You must ask your specific lender what kind of loan youll be eligible for.
You May Like: What Credit Score Is Needed For Usaa Auto Loan
When Does It Make Sense To Get A Jumbo Loan
If you want to buy a luxury home, or one with amenities that make it significantly more expensive than the average home in your community or county, a jumbo loan may be your only option for financing the purchase. Applying for a jumbo loan only makes sense if you have the financial resources needed to pass the rigorous qualification process, including a credit score of about 700 or better and sufficient liquid assets to cover a down payment of 20% or more, origination fees, appraisal and at least six months of payments on the loan.
How Does Someone Qualify For A Jumbo Mortgage What Are The Interest Rates
Because jumbo loans are for a large amount of money, your credit score and credit history will need to be in great shape.
Expect lenders to look for a above 700 perhaps even above 720 and a low debt-to-income ratio, which refers to the amount of debt you are repaying monthly in relation to your income. A DTI of 36% is preferred, though there may be wiggle room up to 45%, depending on your assets and the lender.
Speaking of which, if youre pursuing a jumbo loan, youll need to be prepared to put down some cash.
I think the first thing people need to know is that youll need to put down 20% or more, notes Cheperdak.
While this isnt strictly true with every lender in every market, a 20% down payment is a pretty common request among jumbo loan providers. An exception to this is if youre qualified to pursue a Veterans Affairs loan the only type of government-backed jumbo loan available in which case the 0% down benefits could extend to jumbo loans.
This is a game-changer, says Cheperdak. In my opinion, this gives our veteran community some of the most flexibility and the most buying power in todays market.
As for jumbo mortgage interest rates, while you might expect a higher-than-normal rate given the higher-than-normal dollar amounts involved, you may be surprised. As of this writing, the current national average interest rate on a 30-year fixed-rate jumbo mortgage is 3.110%. Meanwhile, the average interest rate on a standard 30-year fixed mortgage is 3.21%.
Recommended Reading: What Credit Score Is Needed For Usaa Auto Loan
Super Jumbo Loans The Really Big Ones
- Its a subjective term that may differ depending on who you ask
- A super jumbo used to be a loan amount above $650,000
- Now it might align with a loan amount beyond the high-cost limit
- Though it probably varies by region and company
While there might be some argument, a true super jumbo loan is probably any loan amount above the high-cost limit for the county, ranging up to $20 million or higher.
This term is certainly relative, depending on the state in which the overzealous loan officer resides. I suppose it can vary based on where you live and what youre used to seeing.
When I worked in the business, a super jumbo was any loan amount over $650,000today it might be a loan amount of $1 million and up thanks to our friend inflation.
CoreLogic defines super jumbo as a loan amount between $10 and $20 million, and have identified over 230 active loans that fit that description.
They note that a whopping 75 percent of them were originated since 2013, a testament to recent sky-high property values.
Tip: You can break up your loan into a first and second mortgage to avoid paying more for a jumbo loan, keeping the first below the conforming loan limit. Just make sure the combined rate is cheaper than what it would be otherwise.
Qualifying For A Jumbo Mortgage
The qualification process for a jumbo loan is similar to the conforming loan process. The lender will review your assets, income and credit score, but there are some differences. Jumbo loans typically have higher qualification standards than conforming loans since lenders take on extra risk with jumbo loans. Because of this, lenders are looking at several key factors to determine your risk level. Generally, this means higher credit, income and cash reserve requirements.
Here are some of the main qualification differences between jumbo and regular mortgages.
What Makes A Mortgage Jumbo
Any loan that falls above the conforming limits is considered a jumbo loan. The FHFA sets conforming loan limits. Fannie Mae and Freddie Mac are government-created mortgage businesses that buy conforming mortgages on the secondary market. Jumbo mortgages are not purchased by Fannie and Freddie. The lenders keep them and take the risk if borrowers do not pay. This is why most lenders require additional proof the borrower will pay back the loan.
Details On A Jumbo Mortgage
The term “jumbo mortgage” refers to a mortgage loan that exceeds the conforming loan limits set by the Federal Housing Finance Agency for mortgages to be acquired by Fannie Mae or Freddie Mac.
For 2017, these limits have increased for the first time in over a decade. Since the limits are based on home price appreciation, and the average U.S. home prices haven’t exceeded their 2007 peak until now, the limits were stuck for years.
The baseline conforming loan limit for a single-family home is now $424,100, up from $417,000. If the home is located in a high-cost area, this limit can be as high as $636,150 in the continental U.S. There are also higher limits for two- to four-unit properties:
|NUMBER OF UNITS|
Data source: Federal Housing Finance Agency.
If your loan amount on a home you wish to purchase will exceed these limits, you’ll probably need to obtain a jumbo mortgage. These loans have interest rates competitive with conventional mortgages — a quick look shows 30-year jumbo mortgage rates advertised between 4% and 4.375%, while the national average for a conventional 30-year fixed-rate mortgage is about 4.1%. However, since these loans aren’t eligible to be purchased by Fannie Mae and Freddie Mac, and therefore represent a greater risk to the lenders, they tend to have stricter requirements, as I’ll discuss in the next section.
Read Also: Does Va Loan Work For Manufactured Homes
Role In Us Housing Bubble
As house prices rose as part of the United States housing bubble, there was a large increase in the number of jumbo loan applicants. Due to rising prices, many consumers had to take out jumbo mortgages in order to buy modest homes in big-city areas this option was no longer limited to high-end luxury residences.
Many of these new loans were 40- or 50-year amortization, or had an interest-only option, similar to subprime loans. That meant that the jumbo loan borrower would pay the loan back over a longer period of time, or could defer any repayment of principal for a few years .However from 2007, as prices fell and the number of foreclosures rose, lenders turned away from providing jumbo mortgages. Lenders that did remain in the jumbo loan market increased rates sharply, with rates up to 1.5 percentage points higher than for conforming loans. This withdrawal from the market led to a lack of lending available to fund the purchases of expensive homes, thus putting further downward pressure on house prices and completing a vicious circle.
The delinquency rate on jumbo loans rose dramatically, tripling over the course of 2009, and by February 2010, almost one in ten jumbo mortgages were ‘seriously delinquent’ .
Pros And Cons Of Jumbo Mortgages
The advantages of a jumbo mortgage are obvious. With this type of loan, you can borrow more than you could with a conventional mortgage, which could allow you to get into a home you otherwise wouldn’t be able to. However, there are a few key disadvantages you should be aware of.
First, there are no low down payment options. You can get a conventional loan with a down payment in the 3% to 5% range, or an FHA loan with a 3.5% down payment. With a jumbo loan, expect your lender to require 20% or more.
Also, jumbo loan credit requirements can be stricter. Since these loans cannot be purchased by Fannie Mae or Freddie Mac, they are seen as riskier. You may be able to qualify for a conventional mortgage with a FICO score as low as 620, and an FHA loan with a score in the 500s. On the other hand, jumbo mortgage lenders typically require a score of 700 or more.
Read Also: Genisys Loan Calculator
Jumbo Loans: Nc And Sc Guidelines
Are you ready to buy your dream home? If so, you may need to borrow a significant amount of money to do so. Jumbo loans can help you to do that. At Dash Home Loans, we offer jumbo loans in North Carolina and South Carolina.
Ready to get started? We make the Jumbo Loan application process easy.
What Is A Jumbo Loan
A jumbo loan, or jumbo mortgage, is a home loan for an amount that exceeds the “conforming loan limit” set on mortgages eligible for purchase by Fannie Mae and Freddie Mac, the government-sponsored enterprises that ultimately buy and administer most single-family-home mortgages in the U.S.
Also Check: How To Find Student Loan Number
What Is A Jumbo Mortgage
First, lets get one thing out of the way. When we talk about home loans, there are two key terms you need to know conforming loans and non-conforming loans. Conforming loans are those equal to or less than the financing limit set by the Federal Housing Finance Agency . Non-conforming loans are those above that limit.
Jumbo mortgages are non-conforming loans used to finance more expensive homes. These loans are higher than the conforming limit, currently $510,400 in most areas. Hence the term jumbo.
Becausejumbo loans are higher than traditional mortgages, they carry a higher risk. This means they can be harder to get than conforming mortgages. Typically, lenders only consider borrowers with a good credit rating, income and cash reserves.
Jumbo Loans Tend To Be More Expensive
- Because they arent backed by Fannie Mae and Freddie Mac
- The loans arent as easy to liquidate and sell to investors on the secondary market
- As such jumbo mortgage rates are generally higher
- But this spread can change over time and may not always be significant
And that means mortgage rates on jumbo loans will be higher how much higher depends on the market. If investor demand for jumbos is strong, the rate spread may be narrow, and vice versa.
Historically, the spread has only been a quarter to a half percentage point, but it widened to as much as two percentage points during the height of the financial crisis, seeing that nobody wanted to touch anything without an implied government guarantee.
Currently, the spread between conforming and jumbo loans is less than half a percentage point. But its not just higher mortgage rates you have to worry about with a jumbo loan.
Because jumbo loans dont adhere to Fannie and Freddies underwriting standards, they dont come with that sought-after government guarantee. Instead, individual banks and lenders set their own jumbo loan guidelines, which are typically more stringent.
For example, youll likely need to come up with a larger down payment while maintaining an excellent credit score. Fannie and Freddie accept credit scores as low as 620. Expect a higher minimum credit score for a jumbo, maybe 660 or 680. Plenty of assets are usually a requirement as well.
Don’t Miss: Is Usaa Good For Auto Loans
Purchasing Or Refinancing Investment Properties With A Jumbo Mortgage
Jumbo loans are not limited to primary residences, making them a viable financing option for investors who want to buy or refinance their high-end properties. However, not all lenders may offer jumbo loan options for secondary or investment properties, and the ones that do could have specific requirements and loan limits. Be sure to do your research beforehand.
The Jumbo Smart loan from Rocket Mortgage® is a great example of a loan option for primary households and rental properties alike. With the Jumbo Smart loan, you can borrow up to $2 million for an investment property. If you want to purchase or refinance a vacation home, the property must be a single-family dwelling. Otherwise, rental properties can be either a single or double unit.
Similar to primary home requirements, youll need at least a 680 FICO® Score and a DTI below 45% to qualify for the Jumbo Smart loan for your investment properties and secondary homes. Requirements may be higher depending on your loan purpose.
Are There Any Disadvantages Of A Jumbo Loan
There are a few things that make jumbo loans less desirable, but these are generally offset by the advantages. Remember, the lender needs to balance the risk. A few items to consider include:
- Higher monthly payments: If you’re interested in keeping your monthly payments low, jumbo loans may not be a good fit. In many cases, the lender will tack on higher processing fees and may require more than one appraisal. If you roll these closing costs into your loan, youre going to see an even higher monthly payment.
- Larger risk burden: The risk of jumbo mortgages doesn’t fall on the lender alone. If you lose your job or are otherwise unable to pay, your higher payment is going to be more difficult to recover from.
- Higher qualification guidelines: The higher credit ratings and other requirements may make it more difficult to qualify for a loan. If you cant meet these requirements, a jumbo loan may not be right for you.
Also Check: Loan Originator License California
When Should Jumbo Loans Be Avoided
You may want to avoid a jumbo loan if you doubt your ability to meet its stiff qualification requirements. In addition, if you feel you may need to resell the property quickly at some point in the future, you may want to consider how energetic the local real estate market is. If the market is slow, or if the property is vastly more expensive than most neighboring properties, it may prove difficult to resell. Even in vigorous markets, potential buyers will likely be subject to the same lengthy mortgage-vetting process you’d have to go through as a buyer, and that can lengthen the amount of time required to complete the sale.
Qualifying for a jumbo mortgage can be a daunting process, and the loan will likely be costly in terms of interest rates and fees even for applicants with very good credit. If your sights are set on an exceptionally expensive property, and you have the means to qualify, a jumbo loan may be the best option for financing your dream home.