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What You Need to Know About Jumbo Loans
When it comes to your home, you have the right to be picky. It’s a place where you’re going to live, raise your kids, make memories with loved ones, and generally spend a large portion of your life. When choosing the perfect home for yourself, or your family, cost shouldn’t have to limit your choices.
If you have found the perfect place, but need more than a little extra financing help, jumbo loans might be what you’re looking for.
What Is a Jumbo Loan?
Most conventional policies in the mortgage sector are established by two government-sponsored agencies, Fannie Mae (FNMA) and Freddie Mac (FHLMC). The two enterprises set limits on the maximum amounts that borrowers can get on particular types of loans. While these limits vary from state to state, and county to county, sometimes they’re just not enough to get you into the home you want. You need a little more. That is where jumbo loans come into play.
A jumbo loan is a type of loan whose amount exceeds the loan limits established by regulatory policies. It is also known as a non-conforming loan.
Explaining a Non-Conforming Loan
Most loans have to conform to certain limits and requirements determined by Fannie Mae and Freddie Mac, and there is no way to receive extra financing above these limits. Currently, the Federal Housing Finance Agency has set the conforming limit to be $424,100, although the value is higher in some regions.
A non-conforming loan doesn’t have to play by the same rules and therefore can offer you more money. Any loan that exceeds that limit is referred to as a non-conforming loan or a jumbo loan.
Jumbo home mortgages are designed to offer borrowers a unique opportunity for purchasing or refinancing luxury homes. Although some terms and conditions are more stringent compared to other loans, jumbo mortgages can be very affordable and a great option. In fact, you can qualify with as little as 10% to 15% down.
The downside is that you are likely to pay a higher interest rate for a jumbo mortgage compared to a conforming one. Good news is that this situation is slowly changing and tending towards lower interest rates thanks to the recent GSE fees increments.
How Much Is a Jumbo Loan?
Generally speaking, in the U.S., the limit for a jumbo home loan is $417,000 in most areas. However, areas that are deemed to be “high cost” attract higher values. In regions like Alaska, Hawaii, and the U.S. Virgin Islands, the limit is pegged at $625,500 and in some areas the maximum limit is $721,050. The best way to find out what you’re eligible for is to talk to an experienced lender like HomeRatge Mortgage, who guarantee quick quotes, low rates, and fast closings.
Pros and Cons of Jumbo Loans
Despite the obvious benefit that jumbo mortgages make it possible for investors and borrowers to acquire high-end properties in high-cost areas, they also come with certain financial drawbacks, including tax implications. So, before you take the leap and apply for a jumbo home mortgage, you might want to weigh the pros and cons of the move. Here is a detailed explanation of both.
- 1. Provide large amounts of cash
About 7 out of 10 home buyers need a loan to finance real estate projects. If you’re eyeing a luxury home, we’re talking about a decent amount of money. Many people just don’t have this amount of cash at hand without a little extra help. With the help of jumbo loans, you’ll be able to get the financing assistance you need to acquire the home you want without having to drain your savings.
- 2. Improved terms and interest rates
They might not be the most accessible loans in the market, but jumbo mortgages are easier to access now more than ever. Most lenders have relaxed their terms to keep up with competition and attract borrowers. These days you can get a jumbo home loan, with as little as 10% down, if you have a FICO score of 720 or higher. In addition to that, their interest rates have been on a decline since 2009 when the federal stimulus package was introduced.
- 3. Simplified borrowing
Before jumbo loans became popular, borrowers were forced to take two or more loans whenever they needed a larger than average amount of money. Now with jumbo loans, keeping track of your finances is much more manageable and less overwhelming.
- 4. Potential for huge savingsThe fact that jumbo loans have a big value means that if you ever decide to refinance your mortgage, even the smallest reduction in interest rates could save thousands of dollars per month.
- 1. Difficult to get
Jumbo loans are generally difficult to get compared to traditional ones. To qualify, you need to prove that you have sufficient assets and income to repay the loan.
- 2. Higher interest rates
It doesn’t matter how good your credit score is, you will still pay higher interest rates on a jumbo loan compared to a traditional one. It is a higher risk for lenders when considering the amounts they’re lending out, so interest rates are not as competitive.
10 Down Jumbo Mortgage
A 20% down payment is the typical figure for jumbo loans, and so if you are planning to apply for one you should expect your lender to quote the same information. Before the 2008 real estate burst, lenders were often willing to relax the 20% down policy to 15% or even 10%, depending on the borrower’s credit score, income, and total assets. But the mortgage bubble burst came with devastating effects that cemented the 20% down as the industry standard for this type of financing.
More relaxed standards
That said, recent improvements in credit policies and increased competition among lenders have once again incentivized them to loosen the 20% down rule, particularly for a group of borrowers known as Henrys. The term is an acronym for “high earner, not rich yet” – a group of consumers who are young professionals in high-paying jobs and deemed to have savings tied up in their retirement accounts.
This group of borrowers not only have the capacity to pay back jumbo loans in the long-term but also have sufficient resources to maintain the home for the sake of refinancing. That is why lenders often feel free to offer them 10% down.
Borrowers who can show proof of wealth and assets also have a chance of enjoying the same 10% down option that is available to Henrys. In fact, a few lenders may even offer lower down payment requirements, if your credit score and wealth status are excellent.
Jumbo Loan Requirements
In order to qualify for a jumbo loan, you must meet the following requirements:
Borrowers should expect to have two appraisals of their property to determine its value. While less common, some lenders will only require one.
- Make a down payment of 20%. If you have good credit and can show proof of wealth, you may be able to put as little as 10% down.
- You should have a credit score of at least 700 and 6 – 12 months’ worth of reserve income. Credit score minimum requirements may differ between different lenders.
- Proper documentation of your income and wealth. This will prove that you have the necessary cash and assets to service the mortgage.
- Proper documentation of all other loans that you hold. Borrowers should have a debt-to-income ratio of at most 43%, including any other loans. Some exceptions may apply if you have great credit or work history.
As you might have noticed, some requirements depend on the lender you choose. When talking about this level of financing, it is more important than ever to make sure you work with a lender that can get you the best terms and conditions, which is exactly our mission here at HomeRate Mortgage. Let’s get you into the home of your dreams.