Mortgages differ greatly in loan size, repayment schedule, and qualification criteria. On the surface, a jumbo loan is exactly what it sounds like: a large loan. However, to really understand jumbo loans, you need to dig a little deeper. Before you can decide whether or not this sizable loan is appropriate for your situation, you must learn about its purpose and requirements. What is a jumbo loan? How can you qualify for a jumbo loan? Do you know when to use a jumbo loan? Scroll down to find out.
What Is a Jumbo Loan?
To truly understand jumbo loans, you need to know a bit about Fannie Mae, Freddie Mac, and loan limits. As Investopedia explains, approximately 90 percent of all U.S. mortgages are backed by Fannie Mae, which is more formally known as the Federal National Mortgage Association, and Freddie Mac, which is properly referred to as the Federal Home Loan Mortgage Corporation. These government-sponsored enterprises will purchase, package, and resell virtually any home loan that conforms to their guidelines.
The size of the loan is one of the factors that determines whether a mortgage is conforming or not. The conforming loan limit set by the Federal Housing Finance Agency for single-family homes currently sits at $424,100 in most housing markets (source). While certain high-cost markets do have higher conforming loan limits, many lenders consider any loan of $424,101 or more to be a jumbo loan.
Requirements for a Jumbo Loan
Since jumbo loans are not eligible for backing by the federal government like their more conventional-sized peers, the requirements for securing a jumbo loan can be a little different. To qualify for a jumbo loan, you will typically need the following (source):
- Exemplary credit. While some lenders will consider borrowers with a credit score of 680 or below for a jumbo loan, many prefer a score of 700 or more. They will also carefully scrutinize your debt-to-income ratio, your overall credit history, and other factors before deciding to extend an offer for a jumbo loan.
- A bigger down payment. Lenders often want borrowers to have a certain percentage of a home’s purchase price as a down payment, so it makes sense that a more expensive home will require a larger down payment. However, for a jumbo loan, lenders often prefer down payments that are equal to a higher percentage of the purchase price, which means you’ll likely need an even heftier down payment. What if you don’t have enough set aside? Some lenders will accept smaller down payments in return for higher interest rates.
- Larger financial reserves. With conforming loans, many lenders want to see that you have enough financial reserves to pay at least a few months of mortgage payments. For a jumbo loan, you’ll need even larger financial reserves. Before agreeing to this type of home loan, lenders want to see reserves equal to 6 to 12 months of mortgage payments.
- More documentation. Acquiring any type of mortgage requires a lot of paperwork. Securing a jumbo loan requires more. In part, this is because people applying for jumbo loans often have more complicated sources of income.
- Mindfulness regarding mortgage insurance. If a borrower secures a conforming loan while putting down less than 20 percent as a down payment, the lender often insists on private mortgage insurance (PMI). With jumbo loans, it’s different. PMI is rarely required, but lenders have other ways to protect their interests. If you purchase a home with less than a 20 percent down payment, the interest rate may be adjusted to cover the cost of self-insuring the jumbo loan.
When to Use a Jumbo Loan
If you aren’t certain about when to use a jumbo loan, focus on the loan amount. A jumbo loan may be your best bet if you want to buy a large or expensive piece of property while only taking out one loan (source). Basically, if you are looking to borrow more than $424,100, you should be seriously investigating jumbo loans.
What if you are purchasing a home in a high-cost area where the conforming loan limit is higher? The conforming loan limit soars to $636,150 in some areas of the country (source). Some lenders use the actual conforming loan limit to define jumbo loans; others consider anything over $424,100 to be a jumbo loan. Discussing your options with your lender is the best way to find out when to use a jumbo loan and when to stick with a conforming mortgage.
Types of Jumbo Loans
Like conforming loans, jumbo loans are not one-size-fits-all mortgage products. Eligible borrowers can find a variety of jumbo loans suitable for various purposes. Some allow the purchase of a property. Renovation jumbo loans provide funds to both purchase and renovate the property in one loan. Other jumbo loans create opportunities for cash-out financing and more. For example, PrimeLending offers qualified borrowers financial solutions in the form of three jumbo loan programs, including the following:
- Jumbo Adjustable-Rate Mortgage (ARM) Program. This program allows borrowers to secure a mortgage that begins with a defined period at a fixed interest rate before switching to an adjustable rate later.
- Jumbo Plus Program. Offering 20-, 25-, and 30-year fixed-rate mortgages in amounts up to $2 million, this program has a maximum loan-to-value ratio of 80 percent.
- Jumbo 95 Percent LTV Program. For loan amounts up to $850,000, this program permits smaller down payments and allows borrowers to choose between fixed- and adjustable-rate mortgages.
Still wondering when to use a jumbo loan? PrimeLending is ready to help. Our team is committed to helping you navigate the home-hunting process so that you can purchase the home of your dreams. At our branches located throughout Kansas City, we can help you explore our wide variety of loan products and programs. Plus, PrimeLending utilizes delegated underwriting, local appraisers, and cutting-edge technology to accelerate the underwriting and closing processes. We’re more than happy to navigate you through the process of buying a new home. When you’re ready to learn more, please give us a call at 844-701-5626.