Getting the Most Out of an FHA Jumbo Loan

Most cities and states in the U.S. have fairly standard and reasonably affordable housing rates. While those rates are consistently rising, unless there is a major recession, there remain a few cities where the costs of housing are much larger than the rest of the country. In order for prospective home buyers to get loans for these homes, they must apply for and receive approval for a jumbo loan that allows them to borrow more than the average borrower to purchase a home.

What many people are unaware of is that the FHA also offers a jumbo loan program allowing those who may need some sort of assistance to qualify for a loan to pursue the dream of homeownership – one that is near and dear to Americans from all economic groups, age groups, and walks of life. The FHA jumbo loan makes homeownership possible for many Americans who would otherwise be unable to consider this dream.

What Is an FHA Jumbo Loan?

An FHA jumbo loan is a loan that exceeds what is considered the normal costs of homeownership across the country. There are several U.S. cities that have been identified as requiring additional loan values in order for the average person to purchase a home that is reasonably safe and in a decent neighborhood for living and raising a family.

The acceptable maximum loan amounts change from year to year depending on the needs of these areas. Part of the reason the costs are so much higher in these areas, which include places like Hawaii, Puerto Rico, Guam, and the US Virgin Islands is that the costs of building materials and construction are so much higher in these areas.

Jumbo loans account for these higher property values based on geographic location allowing borrowers who have no responsibility in these costs at all, to purchase homes where they live rather than forcing them out of the home buying market altogether.

How Are FHA Jumbo Loans Different from Conventional Jumbo Loans?

FHA jumbo loans are similar to conventional jumbo loans. The primary difference is that FHA loans are backed by the government which offers somewhat more favorable terms and rates. However, jumbo conventional loans may offer relief from things like private mortgage insurance once buyers reach 20 percent equity in the home. The need for mortgage insurance does not go away when you obtain an FHA jumbo loan.

Another difference is that lenders are a little more forgiving with things like the credit situation and down payment requirements that conventional jumbo loans have in place for borrowers. This allows people to get into these higher-priced homes a little more easily with FHA jumbo mortgages than with conventional jumbo mortgages.

What Qualifies as an FHA Jumbo Loan?

FHA jumbo loans are loans that go beyond the borrowing limits of standard FHA mortgage loans but are located in specific areas that have been identified as high-cost areas for the purpose of mortgage lending. Because these loans exceed the maximum amount for “conforming” loans in the country, jumbo loans, FHA or otherwise, are considered “non-conforming” loans.

Because these loans do not conform to the standard guidelines created by the government for FHA loans, they have stricter regulations and underwriting requirements related to them. This means borrowers will have a little more difficulty qualifying for these loans than for traditional FHA mortgage loans.

However, it is often possible that buyers in these higher-priced markets also have the means to manage these types of mortgage payments while maintaining the favorable credit scores and debt-to-income ratios required to qualify for these loans.

Changes to FHA Mortgage Loans and FHA Jumbo Mortgage Loans for 2021

Big changes are coming to the FHA jumbo loan program for 2021. In fact, big changes are coming all-around when it comes to FHA loans for the coming year. The most notable change is in the limits for these loans. The basic FHA loan for most of the country will increase the maximum loan amount by nearly $25,000 to a total of $356,362 compared to the 2020 maximum loan amount of $331,760. While that increase is substantial, it pales in comparison to FHA jumbo loan increases which amount to nearly $57,000 (more than double the increase for standard FHA home loans). This takes the limit from $765,500 in 2020 to $822,375 in 2021.

These increases are not at all insubstantial and they represent huge bonuses to families in need of FHA loan assistance. However, there are things you can do that will help you get more mileage from your FHA loan. The more of these things you do, the better ROI you can expect from your FHA jumbo loan when it comes to important issues like the total cost of the loan, total buying power in your community, and how much “house” you can expect to buy for your dollars. Here’s what you need to know.

Pay Attention to the Pros and Cons

The bottom line is that there are plenty of pros and cons to keep in mind when exploring your loan options. FHA jumbo loans allow people who may otherwise be priced out of homes in certain areas to accomplish the dream of homeownership – at a high price. You have to be sure that you’re not only willing to pay the higher price associated with jumbo loans, even FHA jumbo loans, but also able to pay them for the duration of the loan or until you can refinance for better terms.

The good news is that now is a great time to buy a home. Interest rates, on average, are better than they’ve ever been. This means historic lows all around. If you live in one of the housing markets where you can’t find reasonable homes for prices below the “jumbo loan” designation, you have to do what you have to do – even if that means paying more than you’d like for interest rates and the privilege of homeownership.

One of the other major considerations concerns your down payment. With a standard FHA loan, you only need to come up with 3.5 percent of the loan amount as a down payment. That isn’t insubstantial for a home loan of $356,362. The expected down payment would be $12,472.62 or greater. With an $822,375 home, though, the down payment expectation increases to $28,783.13. At 3.5 percent.

The unfortunate difference is that standard, non-jumbo FHA loans allow you to use down payment assistance to help pay for your down payment. That isn’t the case with FHA jumbo loans. That alone can make them much more difficult for the average home buyer and is worth noting. You must also set aside enough money to cover closing costs in addition to your down payment. That means you need to expect to spend another one to two percent of the total cost of the property in addition to your down payment. Because these loans are so large, this can come as an unanticipated shock to many buyers.

Improve Your Credit Score

Even if your credit score is already impressive, it is worth a quick check to make sure there are no red flags, inaccuracies, and otherwise questionable information on your credit score before applying for an FHA jumbo loan. The better your credit picture, the lower your interest rate will be. At $800,000 plus, even reducing your rates one half of a point can save you a ton of money over a 30-year loan.

Another consideration is that FHA jumbo loans have stricter requirements for credit scores than standard FHA loans. Instead of a minimal 580 credit score, for instance, FHA jumbo loans require a minimum credit score of 600 with some lenders requiring 640 as a minimum credit score for consideration.

These loans absolutely have higher interest rates than standard FHA loans, however, improving your credit score even more (before applying) can help you get a better interest rate than the minimal credit score affords – even when securing jumbo FHA loans. The silver lining here is that the interest rates remain lower than conventional, non-government jumbo loans. The better you understand these differences, the wiser choices you can make when getting essential funding to finance your piece of the American dream.

Get Your Paperwork in Order

There are different requirements when it comes to paperwork for FHA jumbo loans and other standard FHA loans. One difference is that you may be required to obtain two separate appraisals. This is usually the case if you are paying less than five percent down or if the local market is a “declining” market.

The bottom line, though, is that if vital information is missing or your paperwork isn’t organized properly for the bank, you could miss out on the benefit of loan approval for your FHA jumbo loan or find yourself paying a higher than the anticipated interest rate for your loan.

Mind Your Debt to Income Ratio

The first question many borrowers have would be, what is a debt to income ratio. That is a ratio that compares your current outstanding debt to your current income. The higher your debt is compared to your income the greater the percentage of debt you have to your income.

For FHA jumbo loans, the maximum debt to income ratio is 43 percent. However, getting your debt to income ratio well below that line before applying can make you a more attractive prospective borrower to lenders.

How can you reduce your debt to income ratio?

The quickest way to accomplish this goal is by paying off your debts. At the very least, pay down the balances you owe on these debts. Things to consider include:

• Pay off low-limit, high-interest credit cards.
• Pay off car notes.
• Pay down your student loans.
• Eliminate other revolving credit accounts.

The goal is to convince lenders that repaying your mortgage will be your highest priority in order to avoid possible conflicts of interest with other creditors and that you are responsible enough to maintain manageable debt in relation to your income.

While there are no one-size-fits-all solutions to getting more mileage out of your FHA jumbo loan, there are things you can do that will help your money go further when applying for these loans such as improving your credit score, decreasing your debt to income ratio, reducing your existing debt, and saving the money necessary to purchase your home.

The American dream of homeownership is a powerful dream that often begins at impossibly young ages. It is something many Americans have been priced out of in higher cost communities but one that FHA jumbo loans are making possible for more and more American families each and every year. The better you understand the requirements and what is expected of you when applying for an FHA jumbo loan the more likely you are to get what you need from the experience.