They are not your typical mortgage with the usual limit. Jumbo loans are used to buy homes, may be larger or pricier, beyond the conforming loan limits set by the FHFA. As expected of a larger loan, higher standards for qualification, e.g. financial capital, credit and equity do apply but you can always shop around.
Why Jumbo Loans?
They are for homebuyers who can afford homes with price tags exceeding their county’s conforming loan limits. The conforming loan limit for a one-unit home in most parts of the U.S. is $424,100. This baseline limit for a single-family home is higher in expensive real estate markets like Suffolk, NY whose maximum loan limit is $636,150.
While the FHA is not related with the FHFA, the former’s conforming loan limits are used by the FHA to determine its own loan limits. For example, FHA loans on a single-family home are generally capped at $275,665. For a one-unit home located in a high-cost area, an FHA loan of up to $636,150 is permissible.
Limits. Jumbo loans easily exceed the conforming loan limits. Without a threshold to constrain them, house hunters can freely bid for homes beyond $424,100.
Rates. Jumbo loan rates are higher than those of conforming and FHA loan rates. But if seen in a historical perspective, the jumbo rates of today are lower than they were in the past. Their interest rate can also be fixed or variable in varying lengths of repayment.
Downpayment. Jumbo mortgages are known for their 20% down payments. That holds true for some lenders, one lender accepts 5% of the purchase price as down payments. There are also many ways to work your way around the higher down payment standard:
- Piggybacking. Subject to your lender’s approval, you may take out a first and second mortgage at once; the first mortgage will cover the 80% of the purchase price and the second mortgage, either a home equity loan or a home equity line of credit, will take care of the 10%. A down payment of 10% will finish off the transaction.
- FHA loans. The FHA insures jumbo loans meant for buying homes in high-cost areas, exceeding its standard $271,050. With an FHA jumbo loan, the down payment could be as low as 3.5%. In exchange for the low down payment, you will pay mortgage insurance premiums.
- VA loans. Interestingly, the VA loan limits are based on conforming loan limits. The VA also backs jumbo loans for purchases beyond $424,100 and the down payment could be little to zero.
Your eligibility for a jumbo loan would largely depend on your credit history. Lenders typically require a base credit score of 700, although some could go lower to 680. Still, rates are in your favor if you have a good credit score.
Your debt-to-income ratio should not be a hurdle if you keep it low at 43% or 45% at most. This metric will tell the lender if you can comfortably take on the mortgage and able to repay.
Lenders will scrutinize your financial capacity for such a loan. You can boost it by showing asset reserves good for several months of mortgage payments.
Indeed, jumbo mortgages are not just for mansions. In expensive housing markets like California with higher median prices, a million-dollar home is the norm. Just consider this: what if the home you’d been eyeing is priced above your county limit of $424,100 or $636,150? A jumbo loan is a possibility, right?