Luxury homes and areas in very competitive real estate markets can require large loans to finance a purchase. Generally speaking, a loan that is over $484,350 is what’s called a jumbo loan by most lenders. With these types of loans, you are not able to access loan programs that are government-sponsored such as Freddie Mac and Fannie Mae.
Jumbo loans are very similar to Freddie Mac and Fannie Mae loans, also known as conforming loans. However, you should know that there are some differences in the cash reserves requirements, the credit score range, and down payment amounts.
Features of a Jumbo Loan
Jumbo loans are also called non-conforming mortgages since they do not “conform” to the loan limits that have been set by Freddie Mac and Fannie Mae. These types of loans are riskier to investors since they don’t have the backing of Freddie or Fannie if the borrower defaults on the loan. Like other loan types, you can get either a fixed interest rate or an adjustable rate on a jumbo loan.
These loans can be used to finance a primary home, investment properties, and vacation or secondary homes. The maximum loan amount will vary by the lender. The state and county also have jumbo mortgage maximums. High-cost areas such as Alaska, Hawaii, Guam, and the U.S. Virgin Islands have had their limit raised to $726,525. You should check with the state and country you wish to purchase the home to verify the maximum limit.
Qualifying for a Jumbo Loan
The underwriting guidelines for a jumbo loan tend to be much stricter than other types of mortgage loans. This is because the loan won’t be backed by a government entity, which in turn reduces the risk to the lender. There is more profit for the lender with these mortgage types since the value of the loan is higher, and borrowers tend to be wealthier.
The documents that your lender will review include your tax returns, W-2s, 1099, bank statements, and investment account information. Be prepared to have these documents on hand to prove your financial health.
A lender might also require that you undergo a second appraisal of the property. This additional process will increase your closing costs. In most cases, a lender will look for a down payment of between 10% and 20% of the value of the home. Lower down payments could result in a higher interest rate on the loan. Jumbo loan borrowers usually don’t have to pay private mortgage insurance (PMI) even if they fall below a 20 percent down payment that’s required by conventional mortgage loans.
As with other types of mortgage loans, it is in your best interest to shop around and compare rates for jumbo loans. Each lender has requirements and fees that could affect what you end up paying.
Benefits of a Jumbo Loan
A key benefit of a jumbo loan is that it allows borrowers to go outside the limitations and restrictions set by Freddie Mac and Fannie Mae. The interest rate that you receive is typically still very competitive. It allows you to finance the home you choose without having to be constrained by the limits set on conforming loans.
It’s typically more convenient to finance a property through one jumbo loan versus trying to get two conforming loans to finance that property. You must understand what your monthly payments will be on a jumbo loan.
You want to make sure that you can keep up with the payments without stretching your financial capacity. Several calculators can help you determine how much home you can afford, which can help establish an acceptable price range before starting your home search.
Our experts at NASB can help you get a jumbo loan on your next home. Give us a call today at 855-465-0753 to get started.