When you are purchasing expensive real estate property, e.g. an apartment, you may find that the number of funds to be borrowed will exceed the limit for a conforming loan which is 484,350 dollars (in most countries). This is when you have to think of a Jumbo loan.
A jumbo loan will allow you to borrow a larger sum of money for a property. However, it is worth noting that since jumbo loans are riskier and larger, the qualifications may also be higher. As a Borrower, you will have to face more requirements and processes to secure the loan. In this article, we are going to talk more about what is a Jumbo Loan or mortgage and who qualifies for a jumbo loan.
In this article we will cover the following topics;
What is a Jumbo Loan?
Jumbo loan is a type of mortgage used to afford properties which are too expensive for a traditional conforming loan. The loan amounts involved exceed the limits which are set by the FHFA or Federal Housing Finance Agency. Also, Jumbo loans aren’t guaranteed by Fannie and Freddie, which means it’s a riskier territory for lenders. They aren’t protected from the losses in case the borrower chooses to default. Because of its risky nature, jumbo loans usually require bigger down payments, higher interest rates, and higher credit scores. You also need to be ready for stricter qualifying requirements. This home loan has its own rules which do not conform to the usual regulations followed nationwide. Jumbo loans are essentially proprietary programs created by lenders and banks to promote bigger loans. So you need to embrace its non-standardized nature before you take the plunge.
The exact value of jumbo mortgages varies from state to state or from country to country. The limits may be higher in places with higher home values. If you really want that property that costs around half a million dollars, but you don’t have enough money sitting in your bank account, a jumbo loan can be your chance to get that luxury property. Just be sure to check your finance and readiness level before you take on this bigger responsibility.
Difference between a jumbo loan and a conforming loan
Having answered the question of what is a Jumbo Loan; let’s now differentiate it from conforming mortgages or loan. The size of the loan is the key difference between a jumbo loan and a conforming loan. However, a Jumbo loan is characterized by other factors including heavy down payment, high-interest rates, and high closing cost. Requirements for a jumbo loan are also high, and the lender needs to verify the credit score of the borrower, debt to income ratio, cash reserves, appraisals, and documentation.
Qualifying for a Jumbo Loan
Since jumbo loans are riskier and larger, the underwriting criteria are stricter. Borrowers will have to expect a more meticulous process. Lenders are guided by a number of factors which include:
The borrower’s credit score
For one to qualify for a jumbo loan, the credit score should be higher than 700 to 720. The minimum is usually 680. This is a far cry from conforming loans which require only a borrowers’ credit score of 620. Lenders can also consider the borrower’s credit history and payment and also their previous lines of credit in their history. They need to verify the borrower’s ability to manage funds and make payments. Therefore, one needs to have a high credit score to secure a Jumbo loan.
Debt to income ratio of the borrower (DTI)
Lenders will also look at the debt to income ratio i.e. monthly debt obligation in comparison to the borrowers’ monthly income. Lenders will look for a low DTI to make sure that the borrower doesn’t have too many debt payments. The DTI requirement should be below 43% and ideally around 36%.
If you have an ample amount of cash in your bank, your Jumbo loan application is more likely to be approved. Most lenders will require the borrower to prove that they have cash reserves to cover at least one year of the mortgage payments.
Documentation for the proof of income
To ascertain your financial capability, a lender requires borrowers to provide varipis documents. These include tax returns documentation of at least two years to prove that the borrower has a steady income and bank statements and information regarding all the investment accounts including all the liquid assets. This is to make sure that the borrower has enough to cover the mortgage payment requirements for at least 6 months.
A Second Appraisal
More often than not, lenders will require an appraisal of the property the borrower is planning to buy.
What differentiates Jumbo Loans from Conforming Loans?
Hefty down payments
Unlike the conforming loans that require a much lower down payment, a jumbo loan will require a bigger percentage of the down payment. This can be high as 20% but can also go just as low as 10%.
Higher interest rates
Depending on the lender and the borrower’s financial condition, Jumbo loan interest rates may be a bit higher than those of the conforming loans. But at times, jumbo loan lenders can also offer more competitive rates. This depends on the current market conditions; hence, it advisable for borrowers to shop around wisely.
High Closing fees and costs
Since jumbo loans are always large and require extra qualifying procedures, borrowers should expect the costs to be higher at the closing table.
Jumbo loan terms
Jumbo loans are generally offered for a term of 15-30 years with funding term of 30 to 60 days. A 15-year loan has a slightly lower interest than a 30-year loan term. This means a borrower can get a jumbo loan rate of 4.7% for a 15-year term loan and a 4.7% rate for a 30-year loan term.
Who then should take a Jumbo Loan?
An individual’s credit need depends on his assets, credit score, and the cost of the property he needs to purchase. Jumbo mortgages or loans are appropriate for those with high income probably earning between $250,000 – $500,000 per annum. These people are popularly known as HENERY (high earners not rich yet). Though these segments of people make a lot of money, they generally have no excess money or accumulated assets.
People under this segment usually have more established credit scores than a homebuyer securing a conforming loan of a lower amount. Jumbo loan lenders will be more willing to do business with such people considering that their creditworthiness is almost guaranteed.
What does a borrower pay for a jumbo loan?
- Interest- Jumbo loans usually attract high-interest rates than other conforming loans. This is due to the large loan sizes involved and the fact that the loans are unsecured. The interest may either be fixed or variable.
- Closing costs– Just like other home loans, jumbo mortgages also feature a closing cost. The appraisal fee is determined by the dollar purchase or specialized properties. Depending on either, the appraisal fee may be quite high.
Rejection of a jumbo loan by the lender
Application of a jumbo loan needs more serious scrutiny by the lender to determine red flags if there are any. Some of the factors that may hold up a Jumbo loan application include:
- Borrower’s inability to provide proof of a stable income or employment.
- Borrower’s assets can’t be verified during the underwriting.
- The source of cash reserves and the down payment are questionable.
Who are Jumbo loan providers?
The providers of jumbo loans are the local banks or the national banks as well as the credit unions and online lenders. Jumbo mortgage lenders may have different lending criteria and requirements. They consider a Jumbo loan to be any loan exceeding the conforming loan limit set. Their loan requirements vary depending on the loan amount the borrower needs.
Final Thoughts on What is a Jumbo Loan?
What is a Jumbo Loan? Homeowners and borrowers will have to expect stricter credit requirements to secure a Jumbo Loan as compared to going for conventional loans. To secure the loan, a borrower needs to have a low debt to income ratio and a strong credit score.
Borrowers should have proof of accessible cash on hand or liquid assets to cover the payments. Jumbo loans are characterized by large down payments, high-interest rates, high closing fees, and costs. Jumbo mortgages or loans are appropriate for individuals with high income probably earning between $250,000 – $500,000 per annum.
If you want that luxury dream home in high-cost areas but have limited funds, a jumbo loan is the way to go. As long as you qualify, it can definitely be your best way to make your dream come true.