The Ins and Outs of Jumbo Mortgages
The rising property values in several parts of the US have many home buyers turning to jumbo loans to finance them.
A jumbo mortgage is a type of mortgage that ranges anywhere between $453,100 to $679,650 (as of 2018), which exceeds the conventional conforming loan limits set by the Federal Housing Finance Agency (FHFA).
Naturally, these types of mortgages offer competitive interest rates when compared with conventional loans. They generally have stricter income, appraisal, and credit score requirements, however.
How to Qualify for A Jumbo Mortgage
If you’re planning to purchase a luxury home that’s half a million dollars or more, you should consider getting a jumbo mortgage. They can be used to purchase primary homes, vacation homes, and investment properties.
The first thing to understand about jumbo mortgages is that each lender has their own maximum loan amount and underwriting is typically stricter since banks are at at more of a risk in the event you default on your payments.
Much like applying for a regular mortgage, you’ll have to meet the following criteria:
- Have enough income to comfortably cover your mortgage payments, as well as other installment loans including car payments, credit card payments, and student loan payments. You’ll need to have a DTI (debt-to-income) ratio of lower than 43%, and sometimes, depending on the bank, less than 36%. You’ll also need to be able to prove your income through W-2’s, 1099’s, investment accounts, bank statements and/or tax returns.
- Have good credit. Since jumbo mortgages are for such large amounts, lenders are looking for applicants with a strong credit profile that demonstrates a history of financial responsibility.
- Have assets that equate to 6 months or more of the mortgage payments.
- Have proper documentation proving ownership of other real estate, non-liquid assets, and also other loans held.
You’ll also need to get two property appraisals to justify the purchase price.
Keep in mind that while these mortgage loans fall under the non-conforming category, they still follow the Consumer Financial Protection Bureau guidelines.
Interest Rates On Jumbo Mortgages
Like regular mortgages, jumbo mortgages have both adjustable or fixed interest rates, with varying term options.
In the past, larger jumbo loans always carried higher interest rates when compared to conventional mortgages since they are riskier loans without a government-backed guarantee from Freddie Mac or Fannie Mae. Also, lenders who have to foreclose on the higher-priced properties due to defaults often have a tougher time selling them.
Rates on jumbo mortgages have steadily decreased over the years to the point of being at par — or even in some cases — even lower than conventional mortgages. In general, when compared to conventional mortgages, banks charge interest rates that are 0.25 and 1.5% more on jumbo loans.
Jumbo mortgage loan down payments have also loosened up along with interest rates. In the past, you would have to put up to 30% of the total home purchase price as a down payment, but depending on underwriting criteria, you may be able to get away with as little as 10-15% down now.
Who Is A Jumbo Mortgage Best For?
Jumbo loans are best for people who are on the path of becoming high net-worth individuals. This group of people is often referred to as HENRY, which stands for “high earners, not rich yet.” They are high-income earners making an estimated $250,000 to $500,000 annually.
People who fall into this demographic might not have the wealth at hand needed to buy a luxury home outright, but they usually have very good credit scores and credit history. They also typically have an established retirement account with high enough amounts that meet the reserve requirements to qualify for jumbo loans.
If this describes your current financial and credit situation, and you have been eyeing a well-appointed property, you may want to consider applying for a jumbo loan.
Reasons Why A Jumbo Loan May Be A Good Option for You
Jumbo mortgages can help make your dream of owning a high-end home a reality. But that’s not all. Here are a few other benefits to consider:
- Jumbo loans typically have a hefty down payment requirement. The good news is that you’ll forego paying for private mortgage insurance (PMI) if you can afford a downpayment that’s at least 20% of the purchase price of the home.
- It’s easier and more cost effective than taking out a first and second mortgage to finance the property. Having to take out two separate loans means two sets of paperwork, meeting underwriting requirements for two different loans, and closing costs for 2 separate loans. Also keep in mind that interest rates on second mortgages are often times much higher than first mortgages, since banks assume more risk.
The Drawbacks of Jumbo Mortgages
While there are many benefits to jumbo mortgages, there are some things you’ll want to keep in mind as you’re evaluating various loan options:
- The down payment and interest rates for these types of loans has decreased in recent years, but interest rates are still higher than those of conventional mortgage rates.
- The risky nature of the loans makes them subject to stricter application requirements. You also require a substantial amount of reserves and proof of the same to pass through underwriting.
- You must have a minimum credit score of 700 to qualify for a jumbo mortgage.
- Mortgage interest is deductible but with jumbo loans, the IRS has placed caps on the deductions you can take. You can only claim deductions on a mortgage that is less than $1 million.
If you’re planning on buying a new home with a property value that doesn’t fall under the limit for conventional financing, then a jumbo loan may potentially be your best option, provided you can qualify for one. Just keep in mind that the application process is stricter, so you’ll want to have all your ducks in a row prior to applying.
Before you begin the home buying process, contact the mortgage experts at Embrace Home Loans. We have over 35 years of experience, and will be happy to explore all of the mortgage financing options that are available to you, so that you have the perfect mortgage to help you buy the perfect home of your dreams.