People hear the term jumbo loan and envision a luxury home owned by an extremely wealthy buyer. Jumbo loans are becoming more commonplace thanks to the competitive housing market. Every home buyer should know what a jumbo mortgage is and how it differs from a conventional mortgage.
When learning more about Jumbo Loans, the buyer should understand the eligibility criteria and requirements. They need to know the conforming loan limits and when a mortgage exceeds them. The limits change annually and vary depending on where the buyer wants to purchase a home.
Eligibility Requirements
Jumbo loans come with stricter eligibility requirements. The borrower must have a strong credit profile before a lender will work with them on a jumbo loan. Most lenders require a credit score of 700 or higher unless compensating factors exist.
Conventional loans typically come with a down payment requirement as low as 3 to 5%. When a person wishes to obtain a jumbo loan, the down payment is typically a minimum of 10% of the purchase price, although it can be 20% or more. The borrower must ensure they have the funds to make this purchase before proceeding with a loan application.
A lender looks at other things when a person applies for a jumbo loan. They assess the borrower’s debt-to-income ratio to determine whether the borrower can afford the monthly mortgage payment. Most lenders look for a debt-to-income ratio that is below 43%. Again, lenders will consider strong compensating factors if a borrower’s debt-to-income ratio exceeds this percentage.
Any person requesting a jumbo loan must have stable employment and consistent income. The lender will require income documentation from multiple sources. They look at salary, bonuses, investments, and more when determining if a borrower can afford a jumbo loan.
Additional Requirements
Jumbo loans come with additional requirements. A borrower might find their lender requires them to have cash reserves that equal several months of mortgage payments. The lender views these reserves as a safety net to ensure a borrower can make the payments as agreed, even if they experience financial hardship.
Jumbo loans often have higher interest rates than conventional loans. Although the difference between the two is not excessive, lenders take on increased risk with jumbo loans, so their interest rates are higher for these financial products. The interest rate varies based on several factors, including lender policies, borrower considerations, and market conditions.
Most jumbo loans do not require private mortgage insurance. Conventional loans require this insurance to reduce lender risk. Because jumbo loans don’t have this insurance, a borrower with a smaller down payment will likely pay a higher interest rate or must meet additional criteria before receiving funds for their purchase.
The Jumbo Loan Process
Obtaining a jumbo loan is similar to receiving a conventional loan. The borrower must choose a knowledgeable lender to help them through this process and get pre-approved. Once the borrower is pre-approved, they can begin looking for a property. They need to understand their loan options and which documentation will be required to proceed with the purchase. However, the borrower must recognize the differences as outlined above.
Every person should have the opportunity to purchase their dream home. This home may be a luxury estate or a high-value property. It might also be a smaller residence in a highly desired neighborhood, leading to a higher price tag for the property. Regardless of what an individual wishes to purchase, they may need a jumbo mortgage. When they do, understanding the process of obtaining this loan is essential. This guide will put any buyer on the right path to obtaining a loan of this type.
