Jumbo loans are mortgages that are more than the conforming limit set by the Federal Housing Finance Agency (FHFA).
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Jumbo Loan Basics
A jumbo loan is a type of mortgage loan that exceeds the conforming loan limit set by the Federal Housing Finance Agency (FHFA). Jumbo loans are available in a variety of loan terms and can be used for a primary residence, second home, or investment property. In order to qualify for a jumbo loan, you’ll need to have a strong credit score and a low debt-to-income ratio.
What is a jumbo loan?
A jumbo loan is a type of mortgage designed to finance luxury homes or those in highly competitive real estate markets. They are typically used by individuals who are unable to qualify for a conventional loan.
Jumbo loans are typically available in both fixed-rate and adjustable-rate mortgage (ARM) formats. They can have terms of up to 30 years, making them attractive to borrowers who want to keep their monthly payments low.
Jumbo loans come with higher interest rates than conventional loans, as they are considered riskier by lenders. Borrowers with excellent credit and strong income may be able to get a jumbo loan with a lower interest rate.
To qualify for a jumbo loan, borrowers must have a strong credit score and income. They will also need to provide documentation of their assets and employment history.
How do jumbo loans differ from conventional loans?
The main difference between a conventional loan and a jumbo loan is that a jumbo loan exceeds the conforming loan limit, which is $484,350 in most counties of the United States. In contrast, a conventional loan doesn’t exceed this limit. Therefore, if you’re looking for a loan larger than $484,350, you may need to apply for a jumbo loan.
Jumbo loans are available in both fixed-rate and adjustable-rate mortgage (ARM) options. They’re also available in a variety of terms, such as 15-year and 30-year terms.
Like conventional loans, jumbo loans can be used to purchase primary residences, secondary homes and investment properties. Borrowers can also use them to refinance their current home.
Qualifying for a Jumbo Loan
Jumbo loans are available for people who want to purchase a home that is priced higher than the Fannie Mae and Freddie Mac loan limits. In order to qualify for a jumbo loan, you will need to have a strong credit score, a low debt-to-income ratio, and a stable employment history.
In order to qualify for a jumbo loan, most lenders require that you have a credit score of 720 or higher. However, there are some lenders that will qualify you with a score of 680. If your credit score is lower than 680, you may still qualify for a loan, but the interest rate will be higher and you may be required to make a larger down payment.
Your debt-to-income ratio, or DTI, is the amount of monthly debt payments you make divided by your monthly income. That number is then expressed as a percentage. For example, if your monthly debt payments are $3,000 and your monthly income is $10,000, your DTI ratio would be 30%.
A jumbo loan is a mortgage that has a higher loan amount than does a conventional conforming loan. Jumbo loans are not backed by Fannie Mae or Freddie Mac and therefore require higher credit scores and typically come with higher interest rates than conforming loans.
To qualify for a jumbo loan with a lower debt-to-income ratio, you will need a higher credit score than you would for a conforming loan. Most lenders require at least 680 for a jumbo loan, but some lenders may require a higher credit score.
Jumbo loans typically carry a slightly higher interest rate ranging from 0.25% to 0.50%, depending upon credit market conditions and the borrower’s qualifications. The loan-to-value ratio on jumbo mortgages is often higher than it is for conforming loans, meaning that more cash may be required for a down payment. Borrowers with excellent credit (730+) and large down payments do not tend to have an issue with obtaining a jumbo loan.
In order to qualify for a jumbo loan, most lenders require that you have reserve funds available. These are funds that can be used to make your mortgage payment if you experience a drop in income, and they act as a cushion in case of an emergency. A general rule of thumb is that you should have enough reserves to cover at least six months of mortgage payments.
Jumbo Loan Programs
A jumbo loan is a mortgage loan that exceeds the maximum loan amount allowed by the Federal National Mortgage Association (FNMA or Fannie Mae). As of 2020, the maximum loan amount is $510,400 for a single-family home. Jumbo loans are available in both fixed-rate and adjustable-rate mortgage (ARM) programs.
Fixed-rate jumbo loan
A fixed-rate loan is exactly what it sounds like: The interest rate never changes, so your monthly payment (not including taxes and insurance) will be the same every month for the life of the loan. The main benefit of a fixed-rate loan is peace of mind — you’ll always know what your payment will be.
With a fixed-rate loan, the interest rate will be higher than on a government-backed loan (like a FHA or VA loan), but lower than on a non-government jumbo loan. That makes it a good middle ground if you want to keep your monthly payments low, but don’t want to pay for private mortgage insurance (PMI).
Adjustable-rate jumbo loan
An adjustable-rate jumbo loan is a type of mortgage loan that has a variable interest rate. This means that your monthly payments can go up or down over time, depending on the market conditions.
Some people choose an adjustable-rate jumbo loan because they think it will give them more flexibility in their budget. Others choose it because it may have a lower interest rate than a fixed-rate loan.
Adjustable-rate jumbo loans typically have a higher interest rate than fixed-rate loans, so you’ll need to consider whether the potential savings are worth the risk of having a variable interest rate.
Interest-only jumbo loan
An interest-only jumbo loan is a monthly installment loan with a term of up to 10 years. You make payments only on the interest for a set period of time, typically five to seven years. After that, the loan principal is amortized over the remaining term of the loan.
With an interest-only jumbo loan, you can make smaller monthly payments and still qualify for a larger loan amount than you could with a conventional fixed-rate mortgage. This can be advantageous if you’re self-employed or have income that fluctuates year to year.
It’s important to remember that with an interest-only jumbo loan, you’re not building equity in your home during the interest-only period. In order to avoid having to make a large balloon payment at the end of your loan term, you may want to consider making additional principal payments each month or refinancing to a traditional jumbo loan before the interest-only period expires.