Dealing with buying a home can be complicated, and there are a lot of terms floating around you might not have heard before and which you might not be sure of the meaning of. One of those terms is "jumbo loan." What exactly is a jumbo loan, and is it an option you should be considering?
What is a Jumbo Loan?
A jumbo loan is also called a "non-conforming conventional mortgage." The word "jumbo" means big, and that is exactly what these loans are. Jumbo loans are for homes that are worth more than you can normally borrow. The limit in most places is $484,350; this is determined by the Federal Housing Finance Agency. The amount changes each year, taking into account the housing market. In high cost regions, the limit can be as much as 150 percent, making it currently $726,525. The limits given are for 2019.
The problem is that these loans can't be guaranteed by Fannie and Freddie, which gives the lender a lot less protection if the borrower defaults. Because of this, a jumbo loan can be harder to qualify for and may come with a variety of restrictions.
How do you Qualify For a Jumbo Loan?
The primary qualification for a jumbo loan is an exceptional credit score. You will need to have a credit score of at least 700, with many lenders requiring a score of 720 or higher. Most also have a debt-to-income ratio cap of 45%. Some lenders may also ask you to show cash reserves that can cover a year of mortgage payments. You may have to hand over copies of all of your tax returns and W-2s, as well as bank statements. They may also ask for a second appraisal.
What are the other Differences?
There are three other differences, and none are in the borrower's favor. Jumbo loans generally require a 20% down payment, may have slightly higher interest rates and generally have higher closing costs. Remember that your lender is taking all of the risk on the loan and you need to be willing to play along with their requirements.
You may also benefit from planning ahead. If the loan amount is not that far above the limit, you may be able to refinance into a better deal once you have paid the principal down.
Should I Take a Jumbo Loan?
The answer is, as with so many things, that it depends. If you are confident you can pay off the loan and really want the property, then a jumbo loan is a reasonable choice.
However, you should also consider alternatives. If the house you are looking at is right at the local limit, then you could try and negotiate with the seller by offering to pay for something to get the asking price just below the limit. You may also be able to pay a higher down payment to get the loan amount down. You should also take steps to improve your credit score.
It's important, though, to know your limits. Not everyone can qualify for a jumbo loan and it may be that you will have to do more saving and working on your credit score before you can borrow that amount of money. Remember that the limits vary geographically, and in higher cost of living areas you can borrow more.
Talk to your lender. They will be able to give a good assessment of your risk and whether they feel you should take out the higher loan amount or not.
If you are looking at a high value property and have a good credit score and steady income, though, you should not be afraid to take out a jumbo loan to secure the home of your dreams.
If you'd like to discuss this type of loan or are ready to get started, First Savings specializes in Jumbo loans. Reach out to one of our local expert Loan Officers today.