Everyone deserves the right to live in their dream home. However, current real estate markets – no matter how favorable – make it increasingly challenging to decide how to finance the home you want. This is because of certain limitations set in place towards loan products backed by Freddie Mac and Fannie Mae, imposing strict regulations on the amount you can only borrow. This makes it difficult for you to have the freedom to choose the residence you want in the neighborhood you prefer without worrying about the inconvenience and hassle of multiple mortgages.
The good thing is: this doesn’t have to be the case. Depending on the price range you’re looking to purchase, you may just be eligible for a jumbo loan. Also, contrary to initial perception, jumbo financing isn’t exclusive for those looking for expensive homes. In fact, you may be surprised about the number of properties that need jumbo loans for financing.
If you’re a prospective home buyer whose home preference falls on a slightly pricier spectrum, a jumbo loan may be best for you. However, by having a comprehensive understanding of what the loan is, how it works, and the specific qualifications needed to apply for it, you can decide whether this is the ideal option for you or if you need to make some adjustments to your buying plans.
A Jumbo Loan refers to a mortgage that you can use to finance homes or properties that are too costly for regular or conventional loans to cover. For example, conforming loans can apply to a maximum amount of $647 200 in most countries, according to the FHFA or the Federal Housing Finance Agency. Properties that exceed this loan limit require jumbo financing. Prospective borrowers may look up their county to discover the specific limits within their own areas and whether or not home prices there typically need jumbo loans.
Also known as non-conforming conventional mortgages, it’s worth remembering that jumbo loans tend to be riskier for lenders since Fannie Mae and Freddie Mac don’t back the loans. This means that the lender won’t have a safety net from losses if a particular borrower defaults from the loan. These jumbo loans are also available with either an adjustable or fixed interest rate, with different terms.
Since jumbo financing generally involves more money and isn’t qualified for Fannie Mae or Freddie Mac insurance, they may come with significant hurdles that you don’t experience in other loan types. For example, borrowers may often need higher down payments and credit scores to be eligible. More than that, they may also entail increased interest rates than usual.
On average, having a credit score of 725 or 700 can already make you eligible for a jumbo loan. Moreover, your debt to income ratio may need to be under 45% or even as low as 36%. However, there is an exemption for borrowers who possess considerable cash reserves. As a common rule, lenders want to have sufficient cash in the bank to pay a year of mortgage payments.
Apart from that, borrowers may also require further documentation of their income to qualify for a jumbo loan. Unlike other types of loans, bank statements prove to be insufficient proof. Usually, they will need to submit entire documents and tax returns such as 1099s and W-2s. Moreover, there may also be a requirement for further home appraisals. These strict regulations allow the lenders to ensure that the property that benefits from the loan has adequate value to cover the costs if something goes awry.
Despite the intensive requirements that you’ll need to expect with jumbo financing, there are still practical advantages you’ll benefit from when you apply for one. One of its main perks is that it permits the borrower to purchase a property that they wouldn’t usually be capable of buying if they settled merely with conforming loans. Jumbo loans allow homebuyers to achieve their dream homes regardless of the price they otherwise won’t consider buying. This gives them the financial freedom to pursue larger or more spacious homes they’d generally be forced to purchase in highly competitive markets.
If you’re considering a jumbo loan, it’s also best to be informed of its drawbacks. For one, jumbo financing tends to be more costly at each stage. Unlike conventional loans with lower down payments, jumbo loans need 20% down payments at most. However, some markets accept a down payment of 10% in specific cases. Aside from this, jumbo loans also have higher interest rates and closing costs. Higher interests coupled with costly total loan amount only mean increased costs of tens and thousands throughout the loan.
The type of loan you should get depends on the property you want to purchase. However, the critical differences between jumbo and conforming loans generally concern down payments, closing fees and costs, and interest rates.
Conforming loans only require low down payments, unlike jumbo loans that can go as high up to 20%. Furthermore, interest rates are also higher in jumbo loans than typical conforming loans. However, it’s still worth acknowledging that this depends on your financial situation and the lender as well. Many lenders may offer jumbo loan rates that are competitive and on par with conforming loan rates. In some cases, jumbo loan rates provide lower rates than conventional loans, though this varies on market conditions. Because of this, make sure that you shop around to secure the best deal for your loan.
The best decision lies at your discretion. It’s good if you consider what you want in your home as well as what you plan to make of it – whether it’s a vacation home, a primary residence, or a real estate investment. This helps you sort out your priorities and help you determine what you can afford, how much you’re willing to spend on, and how your decision can ultimately benefit you in the future. By choosing to look at the larger picture, you can arrive at a wise decision regarding selecting the kind of home you want and is best for you, especially the kind of residence that fits your lifestyle the most.
