We all have that dream home in our minds. Perhaps yours is a small ranch-style…
You’ve done it. You’ve found the perfect property. Maybe it’s a vacation home in a trendy beach town. Perhaps it’s the house you’ve always dreamed of owning for yourself. Or maybe you live in an area where real estate is high-priced. In any case, you’re ready to pull the trigger and buy. But that’s when you’re told that you’re not able to take out a conventional loan. Instead, they inform you that you need a jumbo loan.
If you’ve never heard that term before, you’re not alone. Here is everything you need to know about this special kind of high-end financing.
What Is a Jumbo Loan?
Simply put, a jumbo loan is a type of mortgage that exceeds the financing limits set down by the Federal Housing Finance Agency. In short, these kinds of loans can’t be guaranteed or purchased by federally-funded Fannie Mae or Freddie Mac.
In most parts of the country, the limit for conventional loans is $647,200, though it is even higher in areas that are federally designated as high-cost markets – up to nearly a million dollars. That means if the loan you are seeking exceeds that amount, it is considered jumbo.
Because jumbo loans are riskier for lenders as they are not federally guaranteed, the underwriting requirements are usually much more rigorous than conventional loans. You’ll need superior credit, a sizable down payment, and you should expect significantly higher closing costs and fees.
With that in mind, there are several benefits to jumbo loans over conventional mortgages. Among them is the elimination of the mortgage insurance requirement you would find on conforming loans, making a jumbo loan a great alternative when you’re shopping for a higher-priced home.
How Do Jumbo Loans Work?
In many ways, jumbo loans function in much the same way as conventional mortgages. These loans are most often utilized by high-income earners, specifically those who make between $250,000 and $500,000 a year. These buyers generally make enough money to be in the market for higher-end properties but are not yet wealthy enough to make their purchase outright.
The good news is if you fall into this category of home buyers, you already likely meet most of the qualifications for a jumbo loan. How much you can take out will depend largely on considerations like your credit score, your existing assets, and the value of the property you are looking to buy.
When you begin the process of looking into jumbo loans, you should be aware that you may have higher-than-average interest rates. Although the APR for these mortgages has recently come down, don’t be surprised if you’re quoted a rate that is slightly more than what you are used to.
There’s one last thing to keep in mind as well: due to a cap on the mortgage interest tax break, you probably won’t be able to deduct the full amount of your interest.
Do I Qualify For a Jumbo Loan?
Now you might be asking yourself the biggest question: will I qualify for a jumbo loan? As with conventional mortgages, there are several key requirements you must meet to be approved for one of these loans.
First, you’ll need a top-tier credit score. Lenders will be seeking at least a 700, with some requiring up to a 720. If you’re in the market for a property that may require a jumbo loan, double-check your credit score or contact a credit specialist to learn ways to boost your number.
The next thing lenders will look at is your debt-to-income ratio or DTI. Although jumbo loans are considered non-conforming, they still are considered qualified mortgages. Therefore, your DTI ratio must fall within the standard guidelines. Usually, this means your DTI should be no higher than 43%, and preferably closer to the 36% mark.
Lastly, you should be prepared to make a down payment of at least 20%. While you’ll most likely be asked to provide a payment of between 10 and 15%, having some extra cash on hand to cover some of the elevated closing costs will save you a headache down the line.
In today’s climate, we know just how stressful home buying can be. Is this your first foray into the realm of high-end properties? The idea of jumbo loans might be a little intimidating. Fortunately, you don’t have to figure it out all on your own. Direct Home Lending is here to help!
Our team is dedicated to streamlining the home loan process for you as much as possible. We also work to find you the lowest interest rates and closing costs. Call us today at 800-575-3648, or visit our website to get a free quote. Finding your dream home has never been so easy.
We look forward to hearing from you soon!