What Are Jumbo Loans And How Do I Qualify?
One of the most important components of shopping for a home is identifying the type of mortgage that best suits your needs. You may need a jumbo loan to buy the house of your dreams, or, in some areas of the country, to buy any house at all. Here’s a guide that can help you decide if a jumbo loan is right for you.
What Are Jumbo Mortgage Loans?
A jumbo loan, or jumbo mortgage loan, is a mortgage loan that exceeds the limits set by the Federal Housing Finance Agency (FHFA). Jumbo loans are called nonconforming loans because they do not conform to those limits. Because these jumbo mortgages don’t have the guarantees that come with conforming loans, borrowers tend to be subject to greater scrutiny and may or may not higher borrowing costs. A jumbo loan may attract different investors than those who are typically into buying conventional mortgage bonds.
Why Are Jumbo Mortgages Treated Differently?
Mortgages are originated by lenders, who immediately sell them to mortgage investors like Fannie Mae or Freddie Mac so that they continue to make loans. But Fannie and Freddie are only authorized to purchase mortgages that conform to the FHFA’s limits. After purchasing these mortgages, Fannie and Freddie bundle them together with other, similar loans for sale to investors on the secondary mortgage market. A similar process often happens for jumbo mortgages, but different investors are involved.
What Are The Conforming Loan Limits?
Fannie and Freddie set limits on how high your mortgage can be – they’re called conforming loan limits. Conforming loan limits vary by state and market. In 2022, you can only borrow up to $647,200 for a single-family unit in most parts of the U.S.
What If I Can’t Find A House Within The Conforming Limits?
If you want to own a home in some of the most expensive housing markets in the U.S., you’ll probably need a jumbo mortgage loan. Don’t worry, though – you’re not alone. With the currently sizzling housing market, many people are finding that even modest homes require a jumbo mortgage in some areas. Because of this demand, lenders are becoming more comfortable offering jumbo mortgages. First Source Capital Mortgage offers loans up to $2.5 million, doesn’t charge PMI and seeks to streamline the amount of paperwork that lenders have traditionally required for amounts above the conforming loan limits.
How Do Jumbo Mortgage Rates Compare To Conforming Loan Rates?
It makes sense that lenders might charge higher interest rates on jumbo loans because, as mentioned before, there’s so much risk involved. However, market data suggests that interest rates on jumbo loans are very competitive with market rates. At today’s rates, the difference between conforming and nonconforming loans ranges from just 0.25% to 1%. In fact, some jumbo loans have rates that are lower than other mortgage loans.
How Does A Jumbo Loan Work?
Like conventional mortgages, you can get jumbo loans in a variety of terms or repayment schedules, and they can be fixed-rate or adjustable-rate loans. At this time, First Source Capital Mortgage is only offering fixed-rate jumbo loans. However, jumbo loans work differently than conventional mortgages. These loans have stricter requirements than other types of mortgages, and you’ll have to meet very specific property type, down payment, credit score and debt-to-income ratio requirements to get one.
- Property Types
You can buy various types of properties with a jumbo loan because there are no government restrictions on how you can use your jumbo loan. As long as you meet your lender’s other requirements, you can use most jumbo mortgages for primary residences, vacation houses and investment properties.
- Down Payment
Jumbo loans typically have much higher down payment requirements compared to conforming loans. It’s common to see lenders require 20% down on jumbo loans for single-family units. You may also need a higher down payment for second homes and multifamily units. Finally, the down payment required is based on your loan amount and credit score as well.
- Credit Score
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 to 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 one or two-unit property with a loan limit up to $1 million
- 720, for loans between $1 million and $1.5 million
- 740, for loans between $1.5 million and $2 million
- Between 720 and 760, to buy a second home, depending on the loan amount.
The minimum credit score for primary residences, vacation homes and investment properties is a 680 median FICO Score. However, a score up to 760 may be required, depending on property type and your intentions for the property.
- Debt-To-Income Ratio (DTI)
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. If you have a higher down payment or credit score, you may qualify for a jumbo loan with a higher DTI ratio.
Can I Get A Jumbo Loan Refinance?
Yes, you can get a jumbo loan refinance – if you meet lender eligibility criteria.
Loan limits and equity requirements for jumbo loans from First Source Capital Mortgage will depend on the purpose of the loan. Contact Billy Curb at (254) 935-0475 about your options.
Does The VA Offer Jumbo Loans?
In general, jumbo loans exist outside government-backed mortgage programs, with one exception: the Veteran’s Administration. The VA offers jumbo loans to qualifying service members. In fact, the VA sets no specific loan limits most of the time. The only limit in many cases is based on lender risk tolerance.
- Loan Requirements
For a VA jumbo loan, it’s possible to get a loan without a down payment, but only with a median FICO Score of 640 or higher for a loan up to $1.5 million. With a median score of 680 or better, you can get a mortgage up to $2 million with a 10% down payment. The VA also allows service members to qualify for a jumbo loan with DTIs up to 60%.
- VA Appraisal Standards
VA property standards are the same for a jumbo loan as they are with a standard VA loan. The home has to be “clean, sanitary, sound and safe” before you move in. Although other loans feature safety checks as well, the VA check is slightly more thorough, in addition to considering the resale value of the property.
- VA Funding Fee
The VA funding fee will be higher on a jumbo loan on the basis of the increased loan amount, so it’s something to plan for. Depending on factors including your down payment and whether it’s your first time using a VA loan, the funding fee is anywhere between 1.4% and 3.6% of the loan amount. The good news is, in addition to covering it yourself, you can ask for a seller concession – or you may be able to finance it into the loan.
- Types Of Property
You must intend to live in your home as a primary residence. You can’t buy a vacation home or investment property with a VA jumbo loan. The loan limit for VA jumbo loans at First Source Capital Mortgage is $1.5 million.
Beyond DTI: Special Requirements For Jumbo Mortgages
When lenders are asked to assume greater risk, they’re going to be particular about who they lend to.
- 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 12 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 are usually in the 3% – 6% range of your total home value, but jumbo loans have much higher closing costs than conventional mortgages. On a $700,000 mortgage, you can expect to pay $35,000 – $53,000 in cash at the closing table.
- Consistent Income
Lenders only offer jumbo loans to buyers who have a predictable and regular income. Lenders often ask to see up to 2 years or more 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.
The Bottom Line: Jumbo Loans Make Homeownership Possible Even In The Most Expensive Real Estate Markets
If you want to buy a home in a high-price market, you’ll need a jumbo loan. The good news is that these loans are getting easier to access online and qualify for. If you’re ready to get rolling, you can start your application right now. If you have questions, feel free to contact Billy Curb at (254) 935-0475 to discuss your particular needs.