Jumbo Loans For When You Need More Than A Regular Mortgage
Sometimes, you might need a mortgage that is too large to be backed by Freddie Mac and Fannie Mae. If you require a loan of this size, you may have to pay more interest, make a larger down payment, and demonstrate a higher credit rating. You may find yourself requiring such a loan if you’re looking for a particularly expensive property or looking to buy in a very popular area.
In this case, a jumbo loan could suit your needs; these loans offer greater amounts than conforming loans (conforming loans are mortgages that meet the stipulations of credit history, existing debt and size of loan for Fannie Mae and Freddie Mac).
Jumbo mortgages and conforming loans are similar in many respects, but you must consider certain essential variations in terms of qualification, which include the size of down payment, the amount of financial reserves you have, and your credit score.
What Are Jumbo Loans?
Jumbo loans, or mortgages, are home loans that exceed the conforming loan limit established by Freddie Mac and Fannie Mae. Sometimes referred to as non-conforming mortgages, lenders consider these loans to carry a higher level of risk because they don’t have the Fannie Mae/Freddie Mac guarantees that protect a lender against financial loss if the mortgagee can’t make their repayments.
Jumbo loans can be taken with variable or fixed interest rates, and their terms also vary. If the federal conforming loan limits for your county are lower than the amount you require, you may have to consider a jumbo loan. The tool below will show you what the federal conforming loan limits are for your county.
Jumbo Loan Qualification
Because jumbo loans are for greater amounts and carry more risk than conventional loans, the qualification requirements are more stringent. They include:
The majority of lenders will require a credit rating of over 700 for a jumbo loan; in many cases, they may require a credit score of up to 720. Certain lenders may, in some circumstances, be satisfied with a credit rating of 680, but that’s normally as low as you will find.
Ratio of Debt To Income
Lenders will take into account your debt-to-income ratio in order to make sure you don’t overextend yourself, although they may be prepared to offer some flexibility, particularly if you have a lot of cash in reserve. Certain lenders will insist that you do not take on any debt for which the repayments are more than 45% of your income.
Having large cash reserves makes it more likely that you will obtain approval for a jumbo loan. A rule of thumb is that you may be asked to demonstrate that you have sufficient cash in hand to cover your mortgage payments for a year.
To show that you are a good prospect for a jumbo loan, you will generally require more proof than might be needed when applying for a conforming loan. You must be ready to offer your bank statements, full information on all your investments, your tax returns, your W-2s, and your 1099s.
Some loan companies may ask for your potential property purchase to be valued at least twice.
The Differences Between Jumbo Loans and Conforming Loans
Obviously, the main difference between jumbo loans and conforming loans is the amount involved. However, there are a number of other differences, and each type of loan has its own advantages and drawbacks. We have provided an overview of some of these differences below.
Higher down payments
Conforming loans often require a down payment of under 20%, which is often the minimum down payment a lender will accept for a jumbo loan. Some lenders will accept a minimum of 10%, for example, SoFi and Wells Fargo (Wells Fargo accepts down payments of 10.1% on jumbo loans of up to $1 million without mortgage insurance). However, other providers, e.g., US bank, ask for a down payment of the minimum 20%.
Higher interest rates
Some lenders may ask you to pay an interest rate that is a little higher for a jumbo mortgage than for a conventional loan, although many may match the conventional loan rate. In some cases, the jumbo mortgage rate might even be a little lower; it pays to investigate.
Greater fees and closing costs
With a bigger loan and more complex procedures, you will find yourself paying more when the deal is closed.
The price of property varies dramatically between counties; as such, for conventional loans, the limits also vary from county to county. In the majority of counties across the country, the 2018 conforming loan limit applied to single unit homes is $453,100. In more expensive areas, particularly on the West Coast and in the north-eastern states, the conforming loan limit rises to $679,650, and in some places, it may be higher still.
Conforming and Nonconforming Loans: the Differences
Conforming loans are those that are generally for a sum lower than $679,650, and have the backing of Freddie Mac and Fannie Mae. Nonconforming (“jumbo”) loans will be for larger sums than this and will attract higher interest rates. Essentially, a conforming loan is one that meets the Fannie Mae and Freddie Mac guidelines, and a non-conforming loan is one that does not. Conforming loans generally have lower interest rates as well as lower fees. These loans are popular with lenders as they can sell them on, which gives them more capital with which they can provide further loans.
What are conforming loans?
Fannie Mae and Freddie Mac, companies sponsored by the government, essentially control the mortgage market. They allow mortgage companies to pool their loans into bundles that they can sell as investments, using the funds gained to issue more loans.
Conforming loans are advantageous, and you can obtain one by sticking to property that is at or below the conforming loan limit for the region in which you want to buy. Fannie Mae and Freddie Mac have a legal obligation to buy out mortgages below the conforming loan limit. The conforming loan limit is set by the Federal Housing Finance Agency: in 2018 it is $403,100, but in areas where property is more expensive it is raised, e.g., for Alaska, Washington DC, and other high-priced metropolitan areas the limit is $679,650. In certain cities in Hawaii and California, the limit is even greater.
Conforming loans are highly advantageous; the tool below shows you what the conforming loan limit for your area is.
Conforming loans have lower qualification requirements, frequently require less cash down, can offer you lower interest rates, and may still be attainable with a less than perfect credit rating.
What are Nonconforming Loans?
A nonconforming loan is called a “jumbo” loan. Different mortgage lenders will have different terms and conditions for such mortgages, but in general, because of the high level of risk involved, jumbo loans will attract higher rates of interest. Nonconforming loans frequently require down payments of 20% plus, an excellent and rigorous proof of income and assets, and higher rates of interest.
More: what you should know about jumbo loans
Trying to find the perfect lender? If you are not sure which lender can offer you the best deal for your home purchase, let us ask you a few questions so that we can match you up with your perfect provider.
Which of these is most important to you?
- Low down payments
- personal service
- Being able to apply online
- closing quickly
- low-interest rates
Other Types of Nonconforming Loans
A loan isn’t always nonconforming just because of its size. Loans can also be called nonconforming or any of these reasons:
- Credit rating for previous credit problems
- A high debt to income ratio
- Down payments of lower than 20%, affecting the loan to value ratio
It is important to note that low down payments don’t necessarily make your loan nonconforming. Fannie Mae offers first-time purchasers a program with 97% LTV; i.e., your loan will still be rated as a conforming loan with just a 3% down payment. Fannie Mae also has a program for previous/current homeowners that requires a low 5% down payment.
If you are unable to obtain a conforming mortgage, you may consider applying for a Federal Housing Administration loan. The FHA will guarantee part of your loan in order to help you get a mortgage, although you should note that this will incur additional charges.