How jumbo loans work
For most people looking to buy a house, a conventional loan or a government-backed mortgage, such as FHA or VA, is common in New England. But for those who are buying a property that extends beyond the loan limits with these programs, it requires what is known as a “jumbo loan.” What is jumbo financing, and how does it vary from other kinds of loan options available to borrowers? We’ll go over everything you could want to know about jumbo loans and whether they might be the right choice for your homebuying journey.
What is a jumbo loan?
A jumbo loan is a mortgage that is greater than the conforming loan limits that are established by the Federal Housing Finance Agency, or FHFA. These loan limits vary by location and are determined each year. These loan limits can be as high as up to $1.1 million or even higher in high-cost real estate markets. If the amount borrowed exceeds such limits, then that constitutes a jumbo loan.
Because jumbo loans are non-conforming, they cannot be purchased by government-sponsored enterprises such as Fannie Mae or Freddie Mac. This means that the lenders take on more of a risk. In turn, jumbo loans require much stricter qualification requirements and higher interest rates than conventional loans.
Why do people use jumbo loans?
Jumbo loans are most common among homebuyers seeking to buy high-value properties. Top reasons for a jumbo loan are:
1. High-cost real estate markets
If the property values of a city are higher than the national average -a buyer may need a jumbo loan to purchase a home in their desired neighborhood or price range.
2. Luxury and custom homes
For those targeting luxury properties, large estates, or custom homes, a jumbo loan would be required to meet the higher purchase prices that exceed the loan limits placed by conventional loans.
3. Investment properties
Investors seeking to purchase multi-family properties or luxury rentals may also utilize jumbo loans to complete their purchases.
How jumbo loans differ from conforming loans
Even though jumbo and conforming loans are both utilized toward the purchase of a real estate, they vary in quite a number of ways:
1. Loan limits
The most obvious variation is the loan amount. Conforming loans go through a lending limit as imposed by the FHFA; jumbo loans exceed this limit.
2. Interest rates
Jumbo loans are slightly more expensive when compared to the interest rates of a conforming loan. For their size and not being guaranteed or indirectly insured by Fannie Mae or Freddie Mac, these types of loans are considered riskier on the part of the lender.
3. Higher credit scores
Jumbo loans carry higher credit scores, typically in the range of 700 and above, since the lenders must bear a greater risk. On the contrary, the conventional loan can allow lower credit scores, especially depending on the lender.
4. Down payment requirements
The down payment for jumbo loans is normally expected to be more than that for other loans-most often 20% or more. For conforming loans, however, down payments can be as low as 3.0% for first-time homebuyers.
5. Debt-to-income ratio (DTI)
The requirements on DTI ratios for lenders will most often be stricter when it comes to jumbo loans. Whereas the general DTI limit on a conforming loan could be 43%, for jumbo loan lenders, this could be much lower in order to minimize their risk.
Advantages of jumbo loans
1. Ability to finance expensive homes
The biggest advantage of jumbo loans is that these types of mortgages allow homebuyers to purchase homes whose value exceeds the conventional limits of a loan.
2. Flexibility
Some lenders will provide variable terms, such as 15- or 30-year fixed-rate jumbo loans, or even adjustable-rate options. This might also be made to give buyers additional flexibility in choosing a loan which best suits their financial situation.
3. No mortgage insurance
Unlike some conforming loans, which may have Private Mortgage Insurance (PMI) for down payments less than 20%, jumbo loans don’t always require PMI. This can keep you a little more under budget in the long run.
Is a jumbo loan right for you?
Jumbo loans are indeed a big help in the purchase of expensive property; however, they might not be a good fit for everyone. First, take into consideration your financial situation and long-term goals before applying for a jumbo loan.
Here are some things to consider before getting a Jumbo Loan
- Affordability: How far are you able to afford the higher down payment along with increased monthly payments?
- Creditworthiness: Is your credit score high enough? Are you financially stable?
- Long-term Stability: Is your income stable enough to handle the added risk associated with a much larger mortgage? Will the property keep its value?
Conclusion
Jumbo financing is a good option for New England buyers who need to borrow more than is allowed under the conforming loan limits. With higher qualifications and possibly greater expense, jumbo financing allows the opportunity to buy homes in highly valued markets or luxury properties. If you’re considering a jumbo loan, weigh the pros and cons, taking a careful look at your financial situation and make sure you find a lender specializing in jumbo financing like Mortgage Equity Partners.
Ready to explore jumbo loans? Contact a knowledgeable mortgage specialist to see if this financing option is the right fit for your dream home or start your pre-approval today.
