So, you’ve been saving up for a little bit, and you’re ready to move into the world of homeownership. Congrats! It’s not only a great time to buy homes, with rates hovering at mortgage multi-year lows, but it’s also a great time to get a jumbo loan potentially.
But what exactly is a jumbo loan? How to tell if you’re eligible for one? And what are the pros and cons of taking out a jumbo mortgage? Let’s take a closer look.
Jumbo Loan: The Basics
Jumbo loans are mortgage loans that exceed the limits set by the (FHA) Federal Housing Finance Agency, which guidelines cannot be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac. They are similar to conventional loans but require more rigorous credit and higher down payments. Jumbo loans have higher interest rates than your average mortgage.
How Do Jumbo Loans Work?
Jumbo loans work the same way as conventional mortgages, except for a few key differences. Here are some of the most important things to know about jumbo loans:
-The conforming loan limits or jumbo loan limits must be at least $625,500. However, some lenders offer competitive jumbo loan rates with rates on conforming loans. There are also some that offer slightly lower rates depending on market conditions.
- You must have a down payment of 20% or more.
- The minimum credit score is 620.
- The borrower’s debt-to-income ratio can’t exceed 43%.
- You must have at least 10% equity in your home.
- The loan must be a fixed-rate mortgage with a term of 30 years or less.
Jumbo Loans Downpayment
Generally, you should expect to make at least a 10% down payment on your jumbo loan. Some lenders may require a minimum of 25% or even 30%. While 20% is an excellent benchmark and can be well-suited for many borrowers’ financial situations, it’s always best to consult with your lender about what options might work best for you.
However, you can go above this amount if you want. Making a larger down payment will make your monthly mortgage payments smaller.
If some of you wonder why jumbo loans require a higher downpayment, here are some of the reasons:
- Jumbo loans are more expensive to originate than conventional loans. The amount starts from $548,251 to $1,054,501.
- Jumbo borrowers tend to have less home equity, which makes lenders nervous about their ability to make timely payments.
- Lenders may also be concerned that your income won’t cover your monthly mortgage payment and other expenses (like food, utilities, and transportation).
- This loan is not guaranteed by Federal Housing Administration, which means you may be responsible for paying the entire loan if it defaults.
Applying for Jumbo Loans
If you think a jumbo loan is right for you, here are some steps to take:
Prepare essential documents before you apply for a jumbo loan; make sure you have the following documents on hand:
- Your most recent tax return and any W-2s and 1099s show your income. Employment verification
- A letter from your employer stating how long you’ve worked at the company and your current salary.
- Your paystubs are also helpful, showing your current income and whether you’ve consistently worked.
- If you are self-employed, you will need to provide a letter from your accountant detailing how much you made last year and your expenses.
- Bank records will also be helpful. You will need to show at least two years of bank statements that detail your income, deposits, and withdrawals. If you have any assets, such as a home or car, be sure to include those on your application as well.
Find a lender
If you have gathered all the documents you need and feel ready to apply, find a lender. Lenders will be able to help you with the application process and help you determine what type of loan you qualify for.
Find the Home You Like
The next step is to find the home you like. Once you have found one, make sure to ask for a copy of the property’s financial statements and verify that it does not have any liens or judgments against it.
Get an Appraisal
You are close to owning the home, but there is one more step you need to take. The lender will require an appraisal on the property to ensure it is worth what you pay. If the appraiser determines that the home’s value is lower than what you expect, they will let you know and ask if you want to proceed with financing your mortgage.
Closing is the final step in getting a jumbo loan. In this phase, the lender ensures everything has been done correctly before approving funds to be released.
Tips to Make the Loan Process Easier
If you plan on getting a jumbo mortgage, it can be helpful to make a list of everything you need. Here are some helpful tips:
- Get pre-qualified. A lender will review your income, credit history, and other factors to determine if you qualify for a jumbo loan.
- Work with a professional real estate agent who has done many jumbo deals. They can help you find the right home and negotiate a reasonable price.
- Maintain your credit score as high as possible and pay down any debt.
- Have your financials in order before applying for the loan. This includes your credit score, bank statements, tax returns, and proof of income.
Jumbo loans are an excellent option for people who need to borrow more than the standard loan amount. They offer competitive interest rates and flexible terms for borrowers with good credit scores and higher incomes. So, if you’re planning to buy a home, get in touch with a mortgage professional to see if you qualify for a jumbo mortgage loan.