A jumbo loan is a loan tailored for borrowers whose mortgage terms would exceed the conforming limits debt set by Fannie Mae and Freddie Mac.
People wishing to buy luxury properties or expensive homes in high-cost areas turn to jumbo loans in order to finance their purchases. Just like VA loans, jumbo loans are not that common and come with their own requirements, particularly because they don’t have the guarantees that conforming loans have.
When it comes to buying a home with jumbo loans, the lender must have the certainty that the loan will get paid, hence the more stringent loan requirements that the Consumer Financial Protection Bureau (CFPB) sets.
Jumbo Loan Benefits
Jumbo loans are not very common but come with their own benefits that make them appealing in certain situations.
Financing Luxury Properties
Many luxury homes and properties in high-demand areas surpass the standard loan limits set by the Federal Housing Finance Agency (FHFA). Jumbo loans allow borrowers to finance such properties with a single home mortgage, rather than combining multiple smaller loans. If you have the financial ability to pay such mortgage loans, a jumbo loan is a helpful tool and may be the best mortgage option for you.
Instead of getting multiple conventional loans to cover the cost of a luxury home, borrowers can consolidate their mortgage into a main jumbo loan. This simplifies monthly payments and overall loan management and streamlines personal finances or other personal loans.
Flexibility in terms
Many lenders offer a variety of terms for jumbo loans, ranging from 15 to 30 years, and with both fixed and adjustable-rate options. This provides borrowers with the flexibility to choose a term that fits their financial situation and future plans.
Refinancing home loan opportunities
Homeowners with existing jumbo loans may have opportunities for a loan refinance, potentially benefiting from lower interest rates, cashing out equity, or changing the loan terms.
Availability for various property types
Jumbo loans are not limited to primary residences. While primarily used for luxury homes, many lenders offer jumbo loans for diverse property types, including second homes, vacation properties, or investment properties.
Jumbo Loan Requirements
Due to their nature, jumbo home loans have a more rigorous mortgage standards and requirements.
Jumbo loan limit
The Federal Housing Finance Agency sets the limit for a conforming loan to $726,200, with a few exceptions like Hawaii and Alaska, as well as some designated areas where the limit stands at $1,089,300.
Borrowers wishing to buy a property whose price exceeds this limit must apply for a jumbo loan. Luxury real estate and properties in sought-after areas can often exceed this limit.
Lenders require borrowers to have stellar credit scores and credit history when they plan to buy a home. This requires a minimum credit score, which means that your credit score must be close to 700 and even higher to qualify for a jumbo loan. Such credit scores give the certainty to lenders that the borrower is creditworthy and will repay the loan and jumbo mortgage rates.
Mortgage lenders will check all the borrower’s expenses, and that includes bills, any other personal loan — business loans, student loans, student loan refinance, car loans, etc. — and even alimony. The goal is to make sure that personal finance is adequate to pay for the jumbo loan and refinance rates.
Most creditors want a debt-to-income ratio of less than 43% but in the case of a jumbo loan, the lender can ask for an even lower ratio, closer to 35%. Again, because jumbo loans are unbacked by the government, the lender wants to ensure that all mortgage payments will be paid on time.
Jumbo loans are geared towards borrowers who can prove they have steady incomes that range between $250,000 and $500,000 to prove they can repay a high-interest rate and loan.
It’s common for lenders to ask for a 20% down payment, although this can drop to 15% if the borrower has cash reserves. The cash reserves act as a safety net in case the borrower can’t repay the loan for a few months. A larger down payment increases the chances of obtaining more favorable terms on the jumbo loan.
The bank can ask for cash reserves. With some money in the bank, your creditor feels safer that the loan will be repaid and is less risky. A lender appreciates cash reserves that can safely cover the mortgage for 12 months even if there is a short-term income disruption. With cash reserves, the bank is more willing to offer better terms on a jumbo loan.
Jumbo loans can come with adjustable or fixed interest rates. Due to the increased risk, it’s sometimes common to see higher interest rates on jumbo loans.
If the borrower puts a down payment of 20%, they won’t have to pay private mortgage insurance (PMI). If the down payment is less than 20%, then they must pay private mortgage insurance, which is included in the monthly mortgage payments.
Fees and closing costs
Because the initial cost is high, the fees and closing costs will also be higher than a typical conventional loan as they are a percentage of the home price.
Just like for any other property, the lender wants to make sure the property’s value aligns with the loan amount, especially in the case of expensive properties.
Jumbo Loan Documents
Lenders must submit the usual documents that are typically required in other loan programs. These include bank statements, pay stubs, W-2 forms, 1099 forms, and tax returns. The borrower must show they have a steady, well-paying job that can safely and comfortably allow them to pay the mortgage.
Additionally, a lender may also request, 401Ks, and other asset documentation for home loans. If there are investments, real estate assets, and cash reserves, these should be presented to the lender to prove the creditworthiness of the borrower.
Contact Society Mortgage for Your Jumbo Loan
Have you found your dream house? Need more information on jumbo mortgages? Need a jumbo loan for your prospective single-family home?
Let Society Mortgage share our experience with you to help you get a jumbo loan that matches your financial criteria. We’ll offer you a clear roadmap for the best mortgage services in the market. Contact us today and we’ll provide you with the latest guidelines on your mortgage loan and step-by-step guidance to NMLS consumer access.
Frequently Asked Questions
Yes, just like conventional loans, there are fixed-rate and adjustable-rate jumbo loans. The right choice depends on your financial situation, how long you plan to stay in the home, and your risk tolerance in the money market.
Typically, jumbo loan rates are slightly higher than conventional loan rates and have stricter terms and conditions due to the increased risk associated with larger loan amounts. However, rates can vary based on the lender, borrower’s creditworthiness, and overall market conditions.