If you are shopping for an expensive home or you live in one of the country’s more expensive communities, you may need to get an unsatisfactory house. mortgage—another thing called a jumbo loan. These loans can be useful because they allow you to borrow more money for the purchase of houses than traditional mortgages.
Obtaining a jumbo loan, however, can be challenging because there are stricter requirements and approval guidelines than mortgages. Applicants usually need a higher credit score, more savings, and a higher down payment. You can also pay a higher rate interest on a jumbo loan rather than a conventional mortgage. But for those who are buying an expensive house or who are buying houses in a region with high housing prices, jumbo loans are an important option.
What is a jumbo loan?
Jumbo loans are mortgages that exceed the standard or loan limit for the area in which you are buying a home. Loan limits are set annually by the Federal Housing Finance Agency (FHFA), and for 2023 the limit in most places is $726,200, but in more expensive regions of the country, it is $1,089,300.
For example, in San Francisco County, California, the 2023 loan for a typical mortgage in the city (one of the most expensive places to live in the country) is $1,089,300. Any loan over this amount will be considered a jumbo loan.
“Jumbo loans can help consumers who are making large purchases, often in more expensive parts of the country,” said Brandon Snow, senior director of mortgage planning for Ally Home.
Importantly, normal loan limits vary from one province to another, meaning that the limit in one province may be significantly higher or lower than another depending on the total cost of housing in the district. Prospective home buyers can find out the loan limits in their area by visiting the Federal Housing Finance Agency (FHA) website.
Because they exceed normal loan limits, jumbo loans are not sold or guaranteed by Fannie Mae or Freddie Mac, the two mortgage companies backed by the government. For that reason, jumbo loans are often considered riskier than traditional mortgages.
Who offers jumbo loans?
Jumbo loans are offered by almost all mortgage brokers. Some of the most popular jumbo loans include Wells Fargo, Rocket Mortgage, Ally Home, Chase, Guaranteed Rate, and Veterans United.
Although these large loans are often widely available, the criteria for approval and interest associated with the loan can vary greatly from lender to lender.
“Lenders may be less comfortable with fixed-rate loans compared to traditional mortgages,” Snow said. “That’s why it’s even more important to don’t shop around for the best jumbo loan options.”
Different criteria can mean that even if you are turned down for a jumbo mortgage by a lender, you may still be able to get approved for the same loan amount. other places.
“It’s important to talk with multiple lenders when looking at a jumbo loan to understand how their unique policies and interest rates may affect your ability to buy or work with a company…there are many options. jumbo in the home,” said Jennifer Beeston, senior vice president of mortgage lending for Certified Rates.
Qualify for a jumbo loan
Although there are different approval criteria, it is generally more difficult to qualify for a jumbo loan. You usually need a very good scorelots of cash savings or reservations, and less debt based on your monthly income.
Low debt to income
The debt-to-income ratio (the amount of your monthly income that must be used to make pay off debt) for jumbo loan requests vary from one creditor to another. Some lenders may allow a slightly higher rate than others.
In the case of Wells Fargo, for example, the amount of credit to income allowed for jumbo loans is lower than the maximum allowed for the borrower’s standard mortgage. For non-conforming, jumbo loans, borrowers must have a DTI of 43% or less. For other loans, the DTI limit may be higher.
“There are programs that can reach 50% debt to income, but generally, I advise you to try to stay below 40%, so that you have more options available,” said Beeston.
Good with good credit score
As with any loan application, the maximum your credit score, the more you will be guaranteed and get the best interest rate. In the case of jumbo loans, however, the minimum acceptable score is usually around 700.
“There are some jumbo programs available below 680, but you will have many options to choose from with a score of 720+,” Beeston said.
Taking steps to pay bills on time and maintaining low balances can help raise your score. And as you pay off new loans over time, your credit score will also improve due to a consistent payment history.
Have enough cash reserves to pay mortgage payments in the case of a change in your financial situation is usually another important point in the jumbo loan approval. However, the exact amount of deposit required is another factor that varies from one lender to another.
“For example, for the same loan amount, one creditor may need 36 months (of savings) while another needs only six months,” said Beeston. “It depends on the amount of loans and the jumbo lender you are working with and you should always get a second opinion.”
How to repay a jumbo loan
The monthly payment amount for jumbo loans is calculated in the same way as for a regular mortgage and includes principal and interest, and, if an escrow account already, tax and insurance. Repayment terms are also comparable to traditional mortgages—offering options such as 15-year and 30-year fixed terms. .
While some buyers may opt for a 30-year mortgage to lower monthly payments, others may choose a shorter, 15-year term to pay off the balance faster and save on interest. during the life of the loan.
There may also be interest-only mortgage options for jumbo loans, which can make the monthly payment for this large loan cheaper because, as the name suggests, it is interest-only. paid by the borrower, not the parent, at the time of origination.
“Consumers who receive a large portion of their income in an annual bonus and those with variable income may want to consider an interest-only loan, as it can help them meet the monthly payment and their cash,” said Sue Barber of Wells Fargo Home Lending.
The pros and cons of using a jumbo loan to buy a home
While jumbo loans can be very useful, especially in some of the most expensive areas of the country, it is important to fully understand how these mortgages work and the advantages and disadvantages they offer for you and your situation. strange.
- Allow yourself to borrow more money: The most notable benefit of a jumbo mortgage is that it gives buyers the opportunity to get more money for the home purchase.
- You can buy a large house: With the amount of money you are putting down, you can buy the house you really want or even more houses to choose from.
- Low Low High Score: The least credit score requirements for a jumbo loan are usually around 700, but for regular loans, it is a little smaller, at 620.
- Maximum deposit required: Jumbo borrowers typically need six to 12 months of savings.
- Minimum wage: Jumbo loans have better approval requirements and applicants may also require a down payment of up to 30%.
Jumbo loans provide borrowers with more loans, and in parts of the country where housing is more expensive, these loans are very important. However, in order to qualify for a jumbo loan, you need to meet loan requirements which usually include a low down payment, plenty of cash reserves, good credit score credit, and low debt to income. As with any type of mortgage, when considering a jumbo loan, it’s important to shop around with multiple lenders to get the best possible deal.