One of the most important components of shopping for a home is identifying the type of mortgage that’s best for you. But what happens if you need to take out a very high-value mortgage? You may need a jumbo loan. Here’s a guide that can help you decide whether a jumbo loan is right for you.
What Is A Jumbo Loan?
Jumbo loans are high-value mortgages that are larger than the conforming loan standards set by the government-sponsored enterprises Fannie Mae and Freddie Mac. Jumbo loans aren’t insured by Fannie and Freddie, which makes them particularly risky for lenders.
You can get a jumbo mortgage for primary residences, second or vacation homes, and investment properties. A jumbo loan will typically have a higher interest rate, stricter underwriting rules and require a larger down payment than a standard mortgage. You can get them in a variety of terms or repayment schedules. Jumbo loans can also be fixed-rate loans, where the interest rate doesn’t change, and adjustable-rate loans, where the interest rate remains fixed for a period, then changes after the fixed period ends.
You might qualify for a VA jumbo loan if you’re a current or former member of the Armed Forces. VA jumbo loans have advantages over regular jumbo loans but have more requirements than standard VA loans. Like a regular VA loan, you can only use a VA jumbo loan for a primary residence. Manufactured homes aren’t eligible for the VA jumbo loan program.
What Are The Conforming Loan Limits?
Fannie and Freddie set limits on how high your mortgage can be – they’re called conforming loan limits. Mortgages that fall under the limit have insurance that protects the lender. Jumbo loans are sometimes called “non-conforming loans” because they go above this limit.
Conforming loan limits vary by state and market. In 2019, you can only borrow up to $484,350 for a single-family unit in most parts of the U.S. However, conforming loan limits go as high as $726,525 in Alaska and Hawaii. They apply to single-family units only – multi-family unit limits are higher and also vary by state. If the amount of money you borrow goes above your limit, your loan automatically becomes a jumbo loan.
What Are The Requirements For Getting A Jumbo Loan?
Jumbo loans have stricter requirements than other types of mortgages. You’ll have to meet very specific property type, down payment, credit score and debt-to-income ratio requirements.
You can buy various types of properties with a jumbo loan. As long as you meet your lender’s other requirements, there are no government restrictions on how you can use your jumbo loan.
If you want a VA jumbo loan, you still need to meet VA property standards like you would with a standard VA loan. You must intend to live in your home as a primary residence. You can’t buy a vacation home, rental home or investment property with a VA jumbo loan. Your home also needs to meet VA appraisal standards as well. The home has to be “clean, sanitary, sound, and safe” before you move in. When you close on your loan, a VA appraiser will take a look at the property to make sure it qualifies.
Jumbo loans typically have much higher down payment requirements compared to conventional loans. It’s common to see lenders require 20% down on jumbo loans for single-family units. However, Quicken Loans® only requires 10% down on home prices up to $1 million. You may also need a higher down payment for investment properties and multi-family units.
VA jumbo loan requirements are less strict but a little more complicated. On loans up to the area’s conforming loan limit, you don’t need a down payment to get a VA loan. However, VA jumbo loans require you to put down at least 25% of the amount of your mortgage above the limit.
For example, let’s say that you want to buy a home with a $600,000 mortgage in an area where your limit is $484,350. Your minimum down payment is 25% of the amount that your loan is over $484,350. Here’s the math:
($600,000 - $484,350) x 25% = A minimum down payment of $28,912.50.
Your credit score is a major factor when it comes to getting a jumbo mortgage. Your credit score is a numerical rating of how reliable you are as a borrower. Your score can range from 300 – 850 and several factors are evaluated to determine your credit score.
You’ll usually need a credit score of at least 700 to get a jumbo loan for a single-family unit. If you’re buying an investment property, the minimum score can be as high as 760.
Your debt-to-income (DTI) ratio compares how much money you earn versus how much debt you have. To find your DTI ratio, divide all of your required minimum monthly payments by the amount you earn before taxes. For example, if you pay $1,000 a month in bills and you bring home $2,000 a month before taxes, your DTI ratio is 50%: $1,000 divided by $2,000.
A low DTI ratio is very important when you get a jumbo loan because it tells lenders that you will have enough cash flow to cover your mortgage payments. Jumbo lenders may require your DTI ratio to be as low as 36% to qualify for a loan. This is lower than the usual industry standard of 50% or less. If you have a higher down payment or credit score, you may qualify for a jumbo loan with a higher DTI ratio.
Should You Take Out A Jumbo Loan?
Before you take out a jumbo loan, consider these factors.
Lenders May Require Cash Reserves
Lenders need to know that you can make consistent, regular payments on a jumbo loan. Your lender will ask you for bank statements to prove that you have money in the bank to keep up with payments. It’s not uncommon for lenders to ask jumbo borrowers to have up to 18 months’ worth of expenses in reserve before they can get a loan.
Having cash in your bank account isn’t the only way to meet reserve requirements. Lenders may consider up to 70% of your retirement account as well, so you don’t need to cash out all of your funds to meet the reserve rule. In some cases, business and gift funds may also go toward your reserve requirements.
Closing Costs Are Higher
Closing costs usually range between 3% – 6% of your total home value, but jumbo loans have much higher closing costs than conventional mortgages. On a $500,000 mortgage, you can expect to pay between $10,000 – $25,000 in cash at the closing table.
Lenders only offer jumbo loans to buyers who have a predictable and regular income. Lenders often ask to see up to two years’ worth of W-2s, tax documents, and 1099s when you get a conventional loan. With a jumbo loan, your lender may ask for more documentation and proof that your income is unlikely to change after you get a loan.
Jumbo loans are manually underwritten. A finance expert will go through your credit report, assets and bank statements with a fine-tooth comb and bring to light any past missteps. If you have a bankruptcy or foreclosure on your report, you’ll have a harder time getting a jumbo loan.
VA Funding Fee
According to VA rules, you can't finance funding fees for loans greater than $484,350. Like the 25% down payment rule, you must pay a prorated VA funding fee in cash during closing on the amount over $484,350. You can also ask the seller to cover this portion of your closing costs in cash.
It makes sense that lenders might charge higher interest rates on jumbo loans because there’s so much risk involved. However, market data suggest that interest rates on jumbo loans are very competitive with market rates.
Jumbo loans are large home loans that are higher than the conforming limits set by Fannie Mae and Freddie Mac. These mortgages are riskier than conventional or government-backed mortgages because they don't have insurance. This means that if you default on a jumbo loan, the bank has to foot the bill. You can use a standard jumbo loan to buy many types of properties, though requirements may vary by lender.
Down payment requirements for jumbo loans are usually higher than conventional mortgages. With a VA jumbo loan, you must make a 25% down payment on the amount over your local conforming limit. Lenders also have higher standards when it comes to DTI ratios, credit scores and cash reserves with jumbo loan applications. It’s important to consider every requirement before you get a jumbo loan.
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