When purchasing a new home, most of us will need to take out a mortgage to transform our dreams into reality. However, the caps on conventional loans can sometimes be a hindrance, putting your ideal home out of reach. Fortunately, these caps can be overcome by taking out a jumbo loan.
Let’s find out more.
What Is a Jumbo Loan?
The name says it all: a jumbo loan is a loan that exceeds the amount of a conventional mortgage loan. Across most U.S. counties, the maximum loan amount for a single-unit home has been set to $548,250 and up to $1,054,500 for a four-unit property. Any mortgage loan that goes above the figures set by the Federal Housing Finance Agency is considered a jumbo loan.
How Do You Qualify for a Jumbo Loan?
Given that there’s a larger loan amount at play, there are a few key differences between getting jumbo loans and getting conventional ones. Lenders typically expect the following before approving a jumbo loan:
Credit score: Most lenders will expect a credit score of at least 700.
DTI ratio: The figure recommended by the FHFA for jumbo loans is below 43%. However, this can be open to interpretation with some lenders. In some cases, it can be closer to 36%.
Appraisal: Most lenders require two home appraisals to offset the risk of approving such a high loan.
Down payment: The traditional down payment for a jumbo loan is 20%, although some lenders can lower it to 10% or 15% in exchange for buying private mortgage insurance.
Cash reserves: Lenders offering a jumbo loan will expect not just a higher income but also cash reserves. Essentially, these reserves help assure your lender that you’re in no danger of defaulting on your payments. In some cases, you may be expected to have up to a year’s worth of mortgage payments in your bank account.
The Pros and Cons of a Jumbo Loan
You Can Borrow More Money
As of 2021, most counties have the maximum amount on conventional loans capped at $548,250 for single-unit properties. So if your dream home is outside that price range, getting a jumbo loan might just be the only way to turn it into a reality.
Jumbo loans offer a great deal of flexibility. You can choose between a 15 or a 30-year mortgage, fixed or adjustable rates, and some lenders might even approve the loan if you have a DTI ratio of up to 45%.
You Can Skip the PMI
In general, jumbo loans will require a down payment of at least 20%. This must be paid upfront, but it does have a perk. Most lenders won’t require private mortgage insurance for a jumbo loan. However, this also ties in with the flexibility we mentioned above: some lenders will agree with a lower down payment and require PMI as a trade-off.
Government-backed Jumbo Loans Come with Their Own Perks
Both the FHA and VA have a jumbo loan option available for eligible customers. In the case of VA-backed jumbo loans, borrowers with full entitlement don’t have a cap on their loan limit and can also benefit from the highly attractive 0% down payment. FHA jumbo loans are also an avenue worth checking out, especially if you want to take advantage of more lenient requirements.
Higher Interest Rates
Jumbo loans typically come with higher interest rates. Of course, mortgage interest rates are subject to change, according to market conditions. Nowadays, the average interest rate for a 30-year fixed jumbo loan is around 2.75% – 3%, with an APR ranging from 2.87% to just shy of 4%.
Stricter Qualifying Criteria
Jumbo loans are often perceived as a high risk for the lender. Should you default on your payments, lenders will have a more challenging time selling a luxury property, which is why they need to protect themselves. This usually translates into more stringent eligibility criteria, such as two appraisals, proof of cash reserves and liquid assets, or a credit score of at least 700.
Higher Closing Costs
When you add them up, the closing costs for a jumbo loan are typically higher than those of closing on a conventional mortgage. Factor in expenses such as two appraisals, the cash reserves you are expected to have set aside, down payments, real estate commissions, title fees and the time spent going through all the qualification steps. Last but not least, you can also expect higher closing costs if you need to refinance your jumbo loan in the future.
This article is intended for informational purposes only and should not be deemed as legal, financial or investment advice or solicitation of any kind. Before purchasing real estate or insurance, always consult with a licensed attorney, financial advisor, insurance agent and real estate broker.