Most loans taken out in the United States follow conforming loan limits, which are limits designed to cover the majority of properties purchased. Conforming limits may change from year to year, but are generally set at a baseline and then adjusted upwards for areas that are higher in value. Jumbo loans are loans that fall over these conforming loan limits. Jumbo loans are usually used to purchase luxury properties. It is generally more difficult to acquire a jumbo loan and jumbo loan rates may be higher than conventional, conforming mortgage loans.
Jumbo Home Loans
In nearly every county across the United States, jumbo home loans are loans that exceed $424,100. In some of the more expensive counties across the country, the loan may be any loan that exceeds $636,150. There are even some rare areas in which the jumbo loan is set at $721,050. In any area, the jumbo loan amounts are set at far above the median price for a property within that area.
Jumbo Loan Requirements
Qualifying for a jumbo loan often requires two appraisals. Not only are luxury properties more difficult to appraise (as there are more factors involved in their valuation), but this can reassure the mortgage lender that they will be able to recover their investment.
Other than appraisals, jumbo loans usually require higher down payments than conforming loans. Down payments for a jumbo loan may range from 15% to 30%, while there are many 0% down or 5% down conforming loans available.
To acquire a jumbo loan, a borrower will usually need a credit score of 700 or higher. They will need a debt-to-income ratio of 43% or less and they may need to show that they have sufficient reserves in their bank account to pay their mortgage for up to a year.
All of these requirements are intended to hedge the bank’s risk. Jumbo loans are riskier than conforming loans not only because their value is greater but also because jumbo loans are difficult for banks to sell following a foreclosure. They are also difficult for a bank to maintain if the bank needs to take possession of it.
Jumbo Mortgage Limits
Jumbo mortgages are limited only by the amount that the borrower can pay for their down payment and by the amount that the borrower can pay for their housing costs every month. As jumbo mortgages already fall over the amount that would otherwise be guaranteed through products such as FHA or VA loans, there is no need for further jumbo mortgage limits.
Types of Jumbo Mortgage Loan
As a jumbo mortgage loan refers to any mortgage loan above conforming limits, there are many different loan packages available through credit unions, banks, and other lending institutions. A conventional jumbo loan may differ from interest-only jumbo loans; there are many packages to choose from. A few types of jumbo loan include:
- VA Jumbo Loan. The VA program allows for jumbo loans through banks that offer a jumbo loan product. The VA will still guarantee some of the loans, up to the limits of a conforming VA loan.
- FHA Jumbo Loan. FHA’s jumbo loan products are similar to FHA’s conforming loans. However, the costs are higher and credit requirements are higher. There is no down payment assistance available for an FHA jumbo loan and the loan limits vary depending on location.
- Conventional Jumbo Loan. A conventional jumbo loan offered through a bank or credit union will be a general loan product without any down payment assistance or concessions.
- Interest only jumbo loans. Interest only jumbo loans are adjustable rate mortgages through which the borrower is able to pay only the interest on the loan for a certain amount of time. Eventually, they will need to pay the full amount of their loan. Interest only jumbo loans are often used for investment properties if the borrower intends to sell the property fairly quickly. This allows for the “flipping” of a property without having to invest a substantial amount in monthly payments.
Most jumbo loans will be conventional loans, but there are advantages to going through FHA or VA programs, even if these programs may have additional requirements.
Jumbo Loan Rates
Jumbo loan interest rates are higher than the rates associated with conventional loans. Jumbo loan rates must compensate for the fact that jumbo loans are higher risk than conforming loans. Even with the stringent requirements associated with a loan, a jumbo loan can be costlier and more likely to become distressed. Jumbo loan rates may vary substantially by area and risk; consequently, California jumbo loan interest rates may differ from New York interest rates. California jumbo loan interest rates could also be higher than average due to the higher limits on loans in that region.
Jumbo loan mortgage rates may be cheaper by getting an adjustable rate mortgage, but an adjustable rate mortgage will eventually increase in cost. Adjustable rate mortgages start off with low mortgage interest fees and then gradually increase these fees later in the mortgage.
If a borrower is able to refinance their mortgage under better terms before the rate increase, this can be a way for a borrower to acquire a property that they could not otherwise afford. Borrowing on an adjustable rate jumbo mortgage can also occur if an individual is planning to have access to additional financial means towards the end of their loan.
Jumbo loan programs vary. Depending on the property a borrower is interested in and their own credit score and financial situation, a borrower may find some jumbo loan programs more attractive than others. Regardless, a jumbo loan is the only way that a borrower can take out a loan for a property that falls above conforming limits in value.
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