As home prices continue to skyrocket, and the need for people to have their dreams homes with a lot of space, there is more for people to acquire a Jumbo loan. The rules and requirements for Jumbo loans are different than conventional loans and as such it is good to get educated about what Jumbo loans are and what you need to know about them before you apply for one.
How big is a Jumbo loan?
Probably the most asked question is when a conventional loan becomes a Jumbo loan. The FHFA(Federal Housing Finance Agency) determines this with a number of factors. It also varies by where you live. Because housing costs change from state to state and even county by county, it is essential to adjust the rates for specific areas. It can vary from year to year as well. In 2017 the maximum limit of $424,100 was increased the first time since 2006.
Qualifying for a Jumbo Loan
The requirements for a Jumbo Loan are stricter than a conventional loan. The bank is taking on a more significant risk because Fannie Mae or Freddie Mac do not guarantee them, and if you don’t have that kind of money in the bank, lenders are smart to require more. The first requires a lender will need to adhere by is an excellent credit rating, usually a 700 or above. While no credit rating is a guarantee to a bank, a 700+ credit score buyer will do whatever it takes to make their payments. The second requirement will be someone that has a very low debt-to-income ratio in the range of 36%-43%. A buyer will need to prove available cash on hand to make the monthly payments, especially if you want the standard 30-year mortgage. The amount you will be able to borrow will depend on your income, assets, credit score and the value of the home you want to buy.
Jumbo Loan Rates
Jumbo loan rates will be higher than a conventional loan, because of the higher cost of the loan, the higher risk, and the longer time it takes for a bank to sell a home if they have to foreclose. The significant difference between a jumbo loan and a conventional loan is the fact that the government does not back a jumbo loan.
Down Payments on Jumbo Loans
The down payment required for a jumbo loan has gone down in recent years. In the past, many jumbo loans required that the borrower put at least 30% down. That rate has gone down to as low as 10 or 15%. Keep in mind that most institutions will still require you to get mortgage insurance if you are below the 20% rate, but depending on the amount of time you plan to be in a home, putting a lower down payment and getting mortgage insurance might make financial sense.
What is the target market for Jumbo loans?
A jumbo loan usually attracts the income earners between $250,000 and $500,000, have good credit and healthy retirement accounts. While this segment has enough money to afford the high monthly mortgage payments, they don’t have millions in the bank to pay for a house with cash.
After the 2008 housing crash, banks are much more cautious with who they loan money to. Loans for more expensive homes create a lot more risks for banks. As a way for banks to lower their risk in lending money, they have created more stringent requirements to get a jumbo loan. Before you get a jumbo loan, learn all the essentials so you can better prepare for your home loan.