Conventional loans, also known as conforming loans, require a borrower to stay within the loan limits set forth by Fannie Mae and Freddie Mac. While these loans do allow for higher limits in high-cost areas, they often exclude those looking to purchase a home which exceeds the county limit in which the property is located.
In most parts of the country, any mortgage for more than $453,100 is considered a jumbo loan. In response to the Fannie Mae and Freddie Mac guidelines, Jumbo loans were created to help those borrowers who wish to purchase a higher-value property but do not have enough money to put down to lower the loan amount to the local conforming loan limit.
These loans are a higher risk to the lender for a number of reasons. The first is due to their large value. If a borrower defaults, the lender stands to lose a significant amount of money. Also, borrowers who have a valuable estate property may not be able to sell quickly for the full price if they get into trouble with their mortgage. These properties appeal to a smaller pool of potential buyers, and as such will take a while to sell. Finally, luxury homes are more vulnerable to shifts in the market.
In general, the jumbo loan was created for luxury buyers, but in some high-value areas, borrowers looking at modestly-sized homes may find that they need a jumbo loan because of high value of real estate in their areas.
Due to the higher risk of a jumbo loan, lenders are rather cautious with the guidelines which govern these loan types. Consequently, they tend to be somewhat conservative in terms of credit requirements, debt to income ratio and assets for reserves.
An individual’s credit profile must have substantial history, one’s debt to income ratio typically can not exceed 45%, and it is usually that case that the borrower must have 6 months of the monthly payment in reserves at the time of closing.
While there was a time when mortgage banks were requiring 20% down payment to purchase a home with jumbo financing, today individuals looking to finance a home with a jumbo mortgage loan can purchase with only 10% down or 10% equity for a refinance.
TERMS AND LOAN LIMITS
Jumbo loans have the same amortization periods as conventional loans such as 15 to 30 year term loans, although longer terms are more common due to the higher monthly payment of a jumbo loan. While there is technically not an upper loan limit, many though individual mortgage banks put a ceiling on the amount they will lend for one property at $3 million.
Fixed-Rate Jumbo Loans
Fixed-rate jumbo loans have an interest rate that does not change over the lifetime of the loan. This will be an interest rate slightly higher than other loan options, but it provides the stability of a monthly payment that does not change over the life of the loan. The most common fixed-rate loans are for 15 and 30 years
Adjustable-Rate Jumbo Loans
Adjustable-rate jumbo loans, or ARMs, have an interest rate that can change. It starts off slightly lower than a fixed-rate jumbo loan with the same terms, but after the initial term the rate can change. Adjustable-rate loans can increase or decrease depending on what happens to federal interest rates. However, there is no guarantee that the rate will go down, and it often goes up, so these loans can end up becoming more expensive over time.
Can I use a jumbo loan to purchase my first home?
Yes, if your credit profile meets the required guidelines and you have the required down payment, you can use a jumbo loan to purchase your first home. In some high-cost areas of the country first-time buyers may have to use a jumbo loan in order to purchase a home.
Can I use a jumbo loan to purchase an investment or vacation property?
Yes, provided your credit score and down payment are high enough, you can use a jumbo loan to purchase an investment or vacation property.
I only need a little more than the conforming loan limits. Do I need a jumbo loan?
A jumbo loan allows you to borrow more than the conforming loan limits, but this may not be necessary. Some lenders will allow borrowers to use a conventional loan in conjunction with a second lien against the property. If you only need 5-10% more than the conforming limit for your area, talk to one of our mortgage specialists about 2nd mortgage options.
Can I purchase a home with a jumbo loan if I don’t have 20 percent to put down?
This is definitely possible as long as your income and credit profile qualify. As a work around, lenders may offer another option. Some lenders will provide a jumbo mortgage that is 80 percent of the property’s value, then a second mortgage at a higher interest rate that covers up to 10 percent of the balance. This eliminates the need for PMI and allows the borrower to purchase without the full 20 percent down payment.
Where can I get a jumbo loan?
Jumbo loans are available through mortgage lenders. However, not all lenders offer jumbo loans. You will need to ask your favorite lender if they have a jumbo loan option, and always shop for the most affordable option by asking for a Good Faith Estimate.
How does the interest rate for jumbo loans compare to the interest rate of a conforming loan?
Jumbo loans have a higher interest rate than conforming loans because they represent a higher risk. However, they may not be significantly higher. Borrowers can expect to pay between .25 to 1 percent more in interest on their jumbo loans. Paying mortgage points can lower this.
PMI is harder to get for jumbo loans, but it is not impossible. However, private mortgage insurance providers have limits on how large of a loan they will insure. Borrowers who want to purchase multi-million dollar properties may not be able to purchase without 20 percent, or more, down on the home.
Can a jumbo loan be refinanced?
When interest rates drop, borrowers often choose to refinance to get a better rate. Jumbo loans can also be refinanced, but the high closing costs on a jumbo loan may make this prohibitive. Some lenders offer extension and consolidation agreements to give borrowers the chance to refinance without high mortgage costs.
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Jumbo loans have similar costs to conventional loans. The most costly part of a jumbo loan is the mortgage interest. Because jumbo loans are riskier, the interest rate is typically higher than the going rate for a conventional loan. However, in recent years the average interest rate for a jumbo loan has dropped, which is good news for those looking to borrow in this way.
Other costs associated with a jumbo loan include the loan origination fee, lender’s fees and down payment. The down payment is a minimum of 20 percent for most lenders, and some lenders will charge an additional 5 percent.