Jumbo Loans: A Powerful Tool in a High Priced Home Market

In today’s high-priced home market, home buyers might need a substantial loan to finance their purchase. 

Buyers should be aware that jumbo loans differ from other loans. They go far beyond the caps and regulatory boundaries of the conforming loans most often associated with mortgages. You shouldn’t dive head-first into this type of financial commitment without doing the legwork. 

Jumbo Loans

Once you’ve completed your research, you might find that a jumbo loan is the best choice for you in today’s high-priced home market. If a jumbo loan doesn’t work for you, it’s recommended that you seek a more traditional form of financing. 

What Are Jumbo Loans?

It’s first essential to define conforming loans before digging into the definition of a jumbo loan.

Conforming loans are standard mortgages or home loans, falling within the Federal Housing Finance Agency’s (FHFA’s) loan limits. 

Conforming loans also follow the Fannie Mae and Freddie Mac standards, allowing both organizations to buy mortgages from the mortgage lender.   

Jumbo loans offer lending limits vastly exceeding what’s available with conforming loans.

Here’s some more context: 2021’s conforming loan limit is $548,250 throughout most U.S. counties. In higher-cost areas, it caps off at $822,375.

Those seeking out expensive properties often need alternative financing methods, primarily due to the lower limits of conforming loans. Jumbo mortgage lenders provide a different option because they operate with their own rules and higher caps.

Who is the Ideal Jumbo Loan Candidate?

Conforming loans and the strict rules they conform to are integral to the current home-financing landscape. Thousands of similar mortgages exist simultaneously with virtually the same guidelines, meaning they can be easily pooled together. From there, Mortgage Backed Securities can be created, causing more liquidity on the mortgage market. 

In this way, conforming loans serve a purpose and might prove the better option for many types of borrowers.

However, if you live in a high-priced housing market or wish to purchase a luxury home, a jumbo loan might better suit your needs. Jumbo loans are an ideal choice for specific homebuyers, such as people with a thriving credit score and a robust list of assets.

People with nontraditional employment arrangements or alternative sources of income might also benefit from jumbo loans.  

Can You Qualify for a Jumbo Loan?

Jumbo loans might be an alternative lending method, but they still have their own approval criteria.

With higher lending amounts comes more risk for the mortgage lender. So, it shouldn’t come as a surprise that approval for jumbo loans is generally much more challenging than with more traditional mortgages.

Here are some of the requirements you’ll need to meet to successfully qualify for a jumbo loan:

  • At a minimum, you’ll usually need a FICO score better than 700 for jumbo loan approval. However, your score can potentially be lower depending on various factors (e.g., earning a high enough income). 
  • You’ll need to save up for at least a 20% downpayment–the standard for jumbo loans: Note that you could find a mainstream jumbo lender offering 10% depending on the circumstances. Sometimes, there are options even lower than that. But those favorable rates will only be available if you’re earning a lot of income, have rock-solid credit, or have a vast number of assets.
  • Jumbo lenders want documentation of the required assets and income proving that you can afford the high-priced property:
    • An ideal candidate will have a consistent source of income. 
    • Provided you’re self-employed, you’ll need tax documents and additional business information, while W2 forms are required for wage-earners. 
    • Having enough reserve assets to afford 6 to 12 months of payments satisfies most jumbo lenders. 
  • While not set in stone by any means, a 43% debt-to-income ratio is a general target set by jumbo lenders. 
    • Borrowers with significant assets have an advantage because potential earnings from those assets can be figured into a lender’s income calculations.

A prevalent theme throughout all these qualification standards is that there’s wiggle room involved. Be sure to ask questions when speaking with you A and N Mortgage Consultant. You might be surprised with what’s available. 

Are There Any Limits for Jumbo Loans?

When it comes to jumbo loans, the sky’s the limit…sort of. 

The maximum amount you can borrow from jumbo mortgage lenders, whether a bank or another investor, depends on the caps and limits they’ve set. One bank may lend all the way up to $5 million, and another lender might not go above $2 million. It all depends on who you’re working with and your ability to repay the loan. A and N has in-house funding for jumbo loans.  Contact A and N Mortgage to learn more. 

How Much Do Jumbo Loans Cost? 

Here are some of the associated costs with taking out a jumbo loan:

Interest Charges

Higher loan amounts mean increased risks for lenders. Therefore, for the most part, you’re dealing with more expensive interest rates than conforming loans. 

Another reason for the hiked-up interest is that jumbo loans are often customized. Jumbo loan applicants may be one-off borrowers who don’t fit into rigid GSE (Government-Sponsored Enterprise) loan standards. As such, applications take a lot of work, and the borrower pays for the extra labor.  

All the same, like any other loan, you can shop around and try to find lower interest options. However, with jumbo loans, you could end up paying more interest costs than someone with a higher rate on a smaller loan.

Lastly, jumbo loans are offered with variable or fixed rates. 

Closing Costs

Just like any other home loan, borrowers of jumbo loans are subject to closing costs.

In this area, you’ll likely see the steepest increase in appraisal fees when compared to more traditional mortgages.

This price increase comes part and parcel with purchasing high-dollar real estate and specialized properties. Moreover, some transactions are complicated enough to require two appraisals before the jumbo loan is approved. 

Mortgage Insurance

Lenders need protection in case a borrower defaults on their loan. Enter mortgage insurance. 

As a rule, borrowers need to take out mortgage insurance for conforming loans where they’re making a small down payment. This stipulation exists because it’s unlikely that lenders can recover funds in the case of foreclosure.

However, mortgage insurance for jumbo loans doesn’t have any set rules. 

The need to pay for private mortgage insurance (PMI) for a jumbo loan rests entirely on the lender. You might find if you make a 20% downpayment, you won’t need to pay for PMI. 

What Are the Alternatives to Jumbo Loans? 

Before taking out a jumbo loan on a luxury property (or a home in a high-priced market), you need to know what other options exist on the market. These alternatives won’t necessarily convince you to seek out another option. But they’ll give you further confidence in your final borrowing decision:

Piggyback Loans

Piggyback loans are a combination of several smaller loans.

You typically end up with two options when piggybacking your loans:

  1. An 80/20 Loan: In this scenario, borrowers have a “1st” mortgage worth 80% of the property’s purchase price. You end up avoiding private mortgage insurance since this means you have an 80% loan-to-value (LTV) ratio. From there, the remaining 20% is covered by the 2nd mortgage.  
  2. An 80/10/10 Loan: With this financing option, you’re still taking out the first loan at 80% LTV. It’s then followed by a 10% down payment, which leaves 10% behind that you’ll borrow on the 2nd mortgage.

Researching a Verifying Lending Limits

Remember that conforming borrowing limits might be higher if you live in high-cost areas than in other regions. 

Taking out a more standard loan might give you preferable rates and less red tape than a jumbo loan, but there’s no guarantee either way. You just want to ensure you’re exploring all available options.

Putting More Money Down

Do you have enough money saved up to put down a larger payment on a high-priced property? This strategy might help you keep your mortgage amount below the conforming loan limit. 

Provided putting more money down is financially feasible, it’s highly suggestible. Borrowing less usually means paying decreased interest.

With that said, having such a significant amount saved up is more of a “perfect world” scenario. 

Thus, jumbo loans are often an attractive financing option for expensive real estate. 

Work With a Trusted Expert to Guide You Through the Jumbo Loan Approval Process

Are you trying to purchase a high-priced property? Jumbo loans are a go-to financing option for such a venture, and our mortgage experts at A and N Mortgage are happy to guide you through the application process.

We’ll also see your application through all stages of your jumbo loan qualification, making all the necessary calculations and streamlining the approval process. 

Do you have any questions about jumbo loans? Contact A and N Mortgage to learn more.

A and N Mortgage Services Inc, a mortgage banker in Chicago, IL provides you with high-quality home loan programs, including FHA home loans, tailored to fit your unique situation with some of the most competitive rates in the nation. Whether you are a first-time homebuyer, relocating to a new job, or buying an investment property, our expert team will help you use your new mortgage as a smart financial tool.

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