Jumbo Loan Guide

What Do You Need to Know About Jumbo Loans?

Everyone knows that banks have limits over what you can borrow, but did you know that there are loans big enough to qualify as jumbo? You may have heard this word thrown around in mortgage lending circles before now. The term "jumbo" means very large over the mega or super.

The term "Jumbo Loan" refers to a mortgage loan with an aggregate principal balance greater than $548,250 in most areas. In normal circumstances, the limits for jumbo loans are determined county by county basis. Riskier for the lender, jumbo loans attract higher interest rates than typical home loans.

How do Jumbo Loans Work?

A jumbo loan exceeds the maximum home loan amount provided by the Federal Housing Administration or a government-sponsored enterprise such as Fannie Mae or Freddie Mac. Most jumbo loans are made by private-sector lenders and are not insured or guaranteed by the federal government.

The jumbo loan process typically includes more paperwork than a traditional mortgage process. The fees involved can also be higher. Lenders may use different criteria when extending jumbo loans because they are riskier than conventional loans.

Conforming loans vs. Jumbo loans

Jumbo loans typically have higher interest rates. A conforming loan meets the minimum mortgage standards set by Fannie Mae and Freddie Mac. These agencies purchase and securitize mortgages from lenders. They set the minimum mortgage amounts for each U.S. county — the conforming loan limit — based on median home prices in that area.

The average interest rate on a jumbo loan was 4.08 percent in January 2018, according to data from Freddie Mac. That's 0.28 percentage points higher than the average interest rate on a conforming 30-year fixed-rate mortgage, which was 3.8 percent in January 2018.

The average interest rate for jumbo loans with an adjustable rate averaged 3.09 percent during the same month — 0.49 percentage points higher than the average rate for 30-year fixed-rate mortgages with an adjustable rate of 2.6 percent during the same month, according to Freddie Mac's data.

Table of differences - conforming loans vs. jumbo loans

4 Reasons to Consider a Jumbo Loan

While carrying a slightly higher interest rate than standard loans, jumbo loans are often worth the higher cost because they allow you to purchase a home with a larger mortgage amount. Additionally, they often have more flexible qualifying requirements, making them attractive for some borrowers. Here are reasons to consider this type of mortgage:

• You need more financing than your bank is willing to offer – Most banks will not lend more than $417,000 for an owner-occupied property and $625,500 for an investment property. If you fall outside these limits, you will have no choice but to look elsewhere for financing.

• You have good or excellent credit – Jumbo loans require a strong credit history and good credit scores to qualify for them. Borrowers with excellent credit will typically have no problem qualifying for jumbo financing through most lenders.

• You want to buy a larger home - A jumbo loan can get you the money you need to pay for your new home. Larger homes can be great for families with kids, especially if they have a lot of kids. These loans are larger than a typical home loan, so make sure you talk to a broker about the specifics of what you can get.

• You have plans for extensive remodeling or additional improvements on your home – If you plan on making extensive renovations or adding a pool, deck, or other extras to your home, then it may be worth borrowing more with a jumbo loan so that you can do all of the work as needed.

Requirements to Qualify for a Jumbo Loan

Buying a new home

• A debt to income ratio not exceeding 38% to 43%
• A credit score of 680 or higher
• A down payment not less than 10% to 30%
• Ability to cover 6-18 months of mortgage payments in the present

Refinancing:

• Equity - No less than 20% for homes below $1.5 million or 40% for homes above $1.5 million
• Credit score - No less than 680
• DTI - Not exceeding 43%

Cash-out refinancing

• Loan limits: $1 - $2 million
• Cash available: $350,000 - $750,000
• Equity: 20% - 30%

If you are considering a property in a high-cost area (like California or New York), make sure you check your local lender's jumbo loan limits before applying for a loan.

How to Apply for a Jumbo Loan

The first step in applying for a jumbo loan is getting pre-approved. Each lender has its own rules and requires different documents from potential borrowers. It's crucial to get pre-approved by several different lenders so you can feel confident you're getting the best rate available. Before applying for the loan, gather all your paperwork together and make sure it's all organized in one place.

Is it hard to get Approved for a Jumbo Loan?

Getting approved for a jumbo loan isn't any harder than getting approved for a smaller loan. The main difference is that you'll need to save more money for your down payment. If you can't come up with enough on your own, ask family and friends to help out.

ARM vs. Fixed Rate Jumbo Loans

Like standard loans, jumbo loans are available in adjustable-rate and fixed-rate varieties. Adjustable-rate mortgages (ARM) are mortgages whose interest rates change over time. The initial period during which the interest rate remains stable is called the "banking period." ARMs are often criticized for their volatility; it's not uncommon for an ARM borrower to see their monthly payments rise.

A fixed-rate jumbo mortgage has a set interest rate for the life of the loan. The mortgage interest rate will not change during the term of the loan. The term is typically 15 or 30 years but can be customized to meet your needs.

Takeaway

A jumbo loan can be a smart decision if you can afford it. Book a call with Phil Ganz to learn more about your Jumbo Loan.