There are so many different loan types out there that it can be hard to keep them all straight! Between bridge loans, conventional and federally-backed, fixed-rate and variable-rate, the terms can quickly become confusing and overwhelming.
One term that you may have heard before but may not fully understand is “jumbo loan” -- here’s what you need to know about this type of loan.
What Are Jumbo Loans?
Jumbo loans are also known as non-conforming conventional loans. A conventional loan is not backed or insured by the United States federal government. That being said, the federal government does still set loan limits for Freddie Mac and Fannie Mae -- federal entities that routinely purchase mortgages issued by private lenders.
This is done to provide stability and liquidity to private lenders like banks. As a result, private lenders give jumbo loans knowing that they will not be purchased or guaranteed by these federal entities for some time until the value of the loan drops below the limit -- making them less convenient and riskier.
In most areas of the United States, the loan limit set by the federal government for a single-family home is $548,250. The limit goes as high as $822,375 in high-cost areas of the country.
This means that when you purchase a highly valued home that will require a loan above the set loan limit, you will automatically need a jumbo loan.
How to Qualify for a Jumbo Loan?
Since jumbo loans are less convenient and riskier for lenders, they have stricter requirements and are harder to qualify for. Here’s what you need to know about qualifying for a jumbo loan:
- Down payment: Many lenders require a downpayment of 20% for a jumbo loan, although you may be able to pay somewhere between 10 and 20%, depending on your lender and other qualifications. These amounts are well above the minimums of 3% and 3.5% for other loan types.
- Credit score: Many lenders require a FICO credit score of 700 and above to qualify for a jumbo loan. Other lenders may require a FICO credit score that exceeds 720. As a result, you’re going to need pretty stellar credit to qualify for a jumbo loan.
- Debt-to-income ratio (DTI): Many lenders require a DTI below 45% to qualify for a jumbo loan. Some lenders may be more flexible about the DTI cap based on the value of your assets.
- Cash reserves: Speaking of assets, lenders require you to have large cash reserves to qualify for a jumbo loan to alleviate the risk they take on by lending you such a large amount of money. Some lenders may require that you have enough cash and savings to cover the cost of one year’s worth of mortgage payments.
- Appraisal: Many lenders will require your home to undergo a second appraisal to confirm that the property’s value aligns with the loan amount.
- Documentation: Applying for any type of mortgage is going to require mounds of paperwork. However, you should expect to provide even more documentation than usual if you’re applying for a jumbo loan. Some things you should expect to provide include W-2s, 1099s (if self-employed), bank statements, retirement and investment account statements, and income tax returns,
What’s the Difference Between a Jumbo Loan and a Conforming Loan?
Now that you better understand jumbo or non-conforming loans, we can discuss their counterparts: conforming loans. A conforming loan is a mortgage that has a value equal to or less than the federal loan limit.
Conforming loans often have more realistic qualifications that make them accessible to many everyday Americans. For instance, the minimum FICO credit score required to qualify for a conforming loan is 620 compared to 700 for a non-conforming loan. The maximum DTI ratio accepted for a conforming loan is 50% compared to 45% for a non-conforming loan. Finally, the minimum down payment required for a conforming loan is 3% compared to at least 10% but likely 20% for a non-conforming loan.
As a result, it’s much easier to meet the requirements for a conforming conventional loan than a non-conforming, conventional loan. Non-conforming loans remain a great option for those with high incomes and assets looking to purchase a high-value home.
When it comes to interest rates, it makes sense that lenders would charge high interest rates for jumbo loans since they are riskier. We have found that non-conforming loan rates are largely competitive with those offered for conforming loans.
Generally speaking, you might expect to pay 0.25 to 1% more in interest with a jumbo loan, but it really just depends on the market conditions and the lender.
Interest rates for non-conforming loans have been known to be lower than those for conforming loans in some situations -- making this loan option worth looking into!
Other Types of Mortgage Loans to Consider
There are other options to consider beyond the conforming and non-conforming varieties we’ve covered so far. To choose the right option for your situation, you need to have all the information.
Here are some of the other types of mortgage loans you may want to consider:
- FHA: This type of mortgage loan is backed by the Federal Housing Administration (FHA). FHA loans are ideal for those without stellar credit histories and those who lack significant cash reserves to afford a sizable down payment of 10 to 20%. Lower requirements make this loan option more accessible for many Americans. You can qualify with a FICO credit score over 580, a DTI below 43%, and a 3.5% down payment.
- USDA: This type of mortgage loan is backed by the U.S. Department of Agriculture and is designed to offer affordable and accessible housing options to those living in rural areas with lower incomes.
- VA: This type of mortgage loan is backed by the U.S. Department of Veterans Affairs and is designed to make home-buying more accessible for U.S. service members and their families. Although service requirements tend to vary depending on the time of service, this type of loan does not require a down payment, PMI, or the payment of closing costs.
Which Type of Mortgage Loan Is Best for You?
Choosing your type of mortgage is a huge decision that can make or break you financially. You’re going to want to look at all the options and choose the right one for your financial situation.
Although it’s difficult to pare down all of the different factors to consider, here’s a general guide to which type of mortgage loan might be best for you:
- If you have a high income, great credit, a large number of assets, and want an expensive home, then a jumbo loan would be a good option for you.
- If you have a decent income, good credit, some cash assets, and want a reasonably priced home, then a conventional loan would be a good option for you.
- If you have a decent income, average credit, and a lack of cash assets, then an FHA loan would be a good option for you.
- If you have low income, poor credit, a lack of cash assets, and live in a rural area, then a USDA loan would be a good option for you.
- If you are serving or have previously served in the military, then a VA loan would be the best option for you.
It’s always a good idea to speak with a lender about your unique financial situation before moving forward in the mortgage process. Lenders are experts in all things related to home buying and will analyze your situation and qualifications to make the best possible recommendation.
When choosing a lender, you should shop around and get rates from different sources. From there, you can select the lowest interest rate that will save you the most money.
You should also consider extra costs like application fees, underwriting fees, processing fees, administrative fees, appraisal fees, inspection fees, private mortgage insurance, and more.
Make sure that you have the full and complete picture up-front in terms of cost so that you don’t end up with an expensive surprise on closing day.
Overall, jumbo loans are an excellent option for those that qualify, thanks to competitive interest rates. The application process is extensive and in-depth, so it’s always a good idea to start preparing your documentation ahead of time.
Also, make sure that you fully understand and agree with the terms of your loan before you sign. Finally, if you ever have any other questions about mortgages or loans in general, reach out to the experts at Vaster Capital.
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