You may have heard of FHA loans, VA loans, or conventional loans, but have you ever heard of a jumbo loan? If you’ve never heard of a jumbo loan before, you may be wondering what it is and how it works.
In a nutshell, a jumbo loan is a financing option for high-dollar homes that exceed what a standard conventional loan will cover. This type of mortgage is typically used for high-end home purchases or luxury properties.
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While jumbo loans are mortgages, there are some distinct differences between them and other more common types of mortgages, particularly in regard to what is required to qualify for one. Read on to learn more about jumbo loans, so you can decide if this could be the right option for financing your next housing purchase.
What Are the Requirements to Qualify for A Jumbo Loan?
Jumbo loans typically have more stringent qualifications than conventional, VA, or FHA loans. For starters, the minimum credit score requirement for a jumbo loan is usually higher than that of other types of mortgages.
As a matter of fact, most lenders will require you to have between a 660-680 credit score to be approved for this type of loan.
Moreover, you may need to provide additional documentation about your income and assets to qualify for jumbo financing, including but not limited to proof of income and proof of a payment reserve (liquid/non-liquid assets that can be used to guarantee your ability to pay the mortgage in the event of job loss, etc.).
In the same vein, you will need to prove that you have a low debt-to-income ratio (typically between 38-43 percent) to qualify. Lastly, you must have a minimum down payment of 10-20 percent, which may be higher than what is required to be approved for other mortgage options.
Will My Rates Be Higher on A Jumbo Loan?
While in years past, jumbo loans were known to carry higher than average interest rates this is no longer the case. Typically, you can expect a jumbo loan to have rates comparable to conventional loans with the possibility that they could actually come in even lower.
Thus, if you are able to qualify for this type of loan, you won’t have to worry about paying high interest rates, simply due to the larger nature of the loan.
Are There Any Benefits to Choosing a Jumbo Loan?
The main reason jumbo loans are a sought-after financing option is because they can be used to purchase a costlier property than could be financed by traditional loan methods due to the restrictions placed by the FHFA.
As such, this type of loan allows those of ample means to purchase the home of their dreams, without having to pay for the entire property in cash or settle for a lesser home in order to secure financing by conventional methods.
Another attractive benefit of jumbo loans is that they can be used to finance more than just primary residences, but also to finance investment or vacation properties. Jumbo loans also provide flexibility as they offer various term lengths, as well as the option for a fixed rate or adjustable-rate mortgage. Overall, jumbo loans help make dreams a reality in a way that traditional loan types simply cannot compete with.
Are There Any Downsides to Choosing a Jumbo Loan?
While there are many great reasons to choose a jumbo loan, it is important to be aware of the potential downsides before deciding if this type of mortgage is right for you. Consider these below:
1) Higher Credit Requirements-For those with low credit scores, a jumbo loan simply may not be an option.
2) Negative Impact on Tax Breaks-The majority of people are able to deduct the entirety of their home mortgage interest, but this may not be the case with a jumbo loan, due to the larger amount of the loan.
3) Pricey Mortgage Insurance-For those who put a down payment of less than 20 percent on their home, mortgage insurance will likely be a necessary expense. Unfortunately, jumbo loans typically carry higher rates for mortgage insurance than other loan types.
4) Difficult to Resell-Remember that if you use a jumbo loan to purchase a property and then choose to resell it later, the next owner will also need to qualify for a jumbo loan. Thus, you will be selling to a much more selective market, making the process of moving your property more difficult, particularly as interest rates increase.
In addition to the potential downsides of a jumbo loan, it is also important to understand that this type of financing is not always available.
Despite its popularity, many lenders still limit their availability of jumbo loans due to the increased risk they carry. Take note that some lenders may even require additional deposits or higher down payments for properties that cost more than the jumbo loan limit in your area.
Ultimately, jumbo loans are a financing option that can provide individuals with the opportunity to purchase a more expensive property than they would traditionally be able to finance.
However, it is important to consider all of the potential risks associated with this type of loan when deciding if this could be the right mortgage option for you.
Is a Jumbo Loan Right for Me?
When deciding if a jumbo loan is the right choice for you, it is important to take into account both your current financial situation and your future plans. Ask yourself whether you see this as a long-term investment and whether or not your job situation is reliable and stable.
In the same vein, consider whether you meet the credit score requirements, have enough money for a down payment, and a payment reserve. Additionally, be sure to analyze how much you can afford to pay each month for the loan and whether a jumbo loan will provide an optimal solution in comparison to other financing options.
After taking an honest assessment of your situation and finances, if you determine that a jumbo loan would be the right choice, you can begin the process of shopping around for the best lender and rate in order to make the most of this financing option!
After learning more about jumbo loans, could this be the right choice to make your dream property a reality!?