What is a Jumbo Loan? Have you reached the stage in your career where you can look at that lovely luxury home on the golf course or mountain home you’ve always dreamed of owning?
If so, you may not realize that luxury homes, the ones that come with the super-sized price tag, require a particular type of mortgage loan, depending on how much you have to put down on the property.
Jumbo loans are available for prospective homeowners who earn sizable incomes but have not (yet) amassed enough wealth to purchase a luxury property with cash.
Jumbo Loan Mortgages
A jumbo loan is a mortgage loan in the United States for an amount higher than the conventional GSE (Federal National Mortgage Association, aka Fannie Mae and Federal Home Loan Mortgage Corporation, aka Freddie Mac) guidelines, also called the conforming loan limit.
In 2020, this amount is $510,440 for a single-family home in Nevada and most of the United States. However, in some markets with exceptionally high real estate prices, the upper limit for conventional loans is increased by 50 percent ($765,600 in 2020).
You can check the conforming loan limit in your area on the FHFA website.
Traditional mortgage loans are often guaranteed or purchased by the federal government via Fannie Mae or Freddie Mac.
However, jumbo loans are not able to be bought or guaranteed like conventional mortgages are.
Therefore, these loans have a higher risk for the lender and usually carry a higher interest rate.
Like conventional mortgage loans, jumbo loans can have fixed or adjustable rates and are available in a range of terms.
There is generally no restriction on using the mortgage for a vacation home or investment property. Jumbo loans are available to purchase land, but there are additional restrictions associated with these types of loans.
Requirements for a typical jumbo loan
Jumbo loans represent a higher risk to the lender because of the dollar amount of the loan and because they aren’t eligible for federal guarantees.
Also, should the borrower default, high-end properties are less likely to sell quickly. Therefore, you’ll need to pass a more rigorous credit check than for a loan under the GSE limit.
Broadly, you’ll need a credit score of at least 700 and a low debt-to-income ratio (36% or below is preferred). Most lenders also require liquid assets adequate to pay for your mortgage for at least six months and often one year.
Most lenders require a bit more paperwork for a jumbo loan than for a conventional mortgage loan.
Jumbo loans often require at least two independent appraisals as part of the loan approval process. This requirement is in place because high-end properties tend to be more volatile in value than lower-priced homes.
Although the down payment requirement for jumbo loans used to be 30 percent, that number has relaxed in recent years. Today, you’ll likely put down only 10 to 15 percent.
However, you’ll avoid private mortgage insurance (PMI) if you put down at least 20 percent.
VA jumbo loans
Active members of the US armed forces and veterans may qualify for a VA jumbo loan.
#faf7f2While requirements for these types of loans are more restrictive than traditional conforming VA home loans, they tend to be easier to get than other types of jumbo loans.
VA jumbo loans require a credit score of at least 640. Unlike conforming VA loans, a down payment is usually 10 percent.
FHA jumbo loans
FHA loans are loans that are guaranteed by the Federal Housing Agency of the US government. Like VA jumbo loans, FHA jumbo loans have more restrictions than their conforming cousins, but fewer than most other types of jumbo loans.
For example, FHA jumbo loans require a FICO score of at least 600, a 3.5 percent down payment (with no down payment assistance), and at least two property appraisals.
Because the amount of the loan amount is higher than average, keep in mind that this will also affect the closing costs, most of which will need to be paid in cash when you close on the property.
Most lenders charge a higher loan origination fee for jumbo loans. As a rule of thumb, you can expect to pay between two and five percent of the purchase price in closing costs.
To learn more about jumbo loans and whether this type of mortgage is the right product for you and your family, contact Lori Ballen.