Non-Conforming "Jumbo" Home Loans
What is a Jumbo Loan?
Jumbo loans or mortgages are, as the name suggests, larger than average loans. They are designed for high income individuals who want to buy homes that are above the conforming limits set by the Federal Housing Financing Authority (FHFA). If you’re shopping for a home that’s larger than life, you’ll need a jumbo mortgage. When it comes to those big houses (and big loans), we’ve got all the information you’ll need to make the right call at Home.Loans. Read on for the details or contact the home loans experts now for the (big) footnotes.
Jumbo Mortgage Basics
Jumbo mortgages happen when you need to get a mortgage valued at more than Fannie Mae or Freddie Mac will, in good conscious, buy from a bank. For 2018, that’s at least $453,100 across most of the country, and up to $721,050 if you’re living in a high cost area like Hawaii. Because Fannie and Freddie have wiped their hands of these enormous loans, they’re known as non-conforming, as opposed to the Fannie- and Freddie-beloved conforming loans.
These notes are good for all sorts of things, from primary homes to investment properties or second homes, but this all comes with a big old bag of caveats. They are not easy to qualify for, and contrary to what some may say, they do require a serious financial investment on your part. After all, what bank wants to get a million dollar house back in foreclosure? The risk is real, so your bank wants to be sure that you’re as serious as they are about your making the payments.
What are Jumbo Loan Terms Like?
Although they are deemed riskier than conventional loans and have stricter qualification standards , jumbo loans do not necessarily have higher rates. The lower administrative costs and business value of jumbo loan applicants has had the effect of making the terms more attractive. Here is what Jumbo loan terms are usually like :
Down payments used to be as high as 30% of the loan but can be reduced to as low as 5% in some cases. Note that the down payment affects the rate you will pay, the lower the down payment the higher the rate and vice versa, so mind how you negotiate this.
Due to the already high monthly payments some lenders are willing to absorb the private mortgage insurance premium even if the down payment is below 20%
Interest rates for jumbo loans used to be higher than conforming loans, but have recently equaled and sometimes beat them
Over the years Jumbo loans have become more attractive because high income borrowers are easier to manage, have good credit and most importantly are a target market for other lucrative financial products like wealth management.
The loan terms can significantly vary from lender to lender. The team at home.loans is eager to help you get the best deals in the market.
Jumbo Mortgage Calculator
If you’re considering getting a jumbo home loan, and want to estimate your potential monthly payments, try our jumbo mortgage calculator. By inputting the loan amount and interest rate, and setting the loan program or term length, you can see what your monthly payments will look like over time. While our calculator doesn’t calculate closing costs (and some other fees), it’s still a great way to see if a jumbo home loan can help you get the home of your dreams.
Since jumbo loans come in adjustable-rate and fixed-rate variations, our jumbo mortgage calculator can help you look into both of these options. And, if you’re considering refinancing your current jumbo loan, our calculator can also provide some much-needed insight.
The jumbo mortgage calculator will help you to estimate your possible monthly payments, broken into principal and interest portions. If you have the appropriate information handy, you could also use the calculator to determine additional monthly expenses such as homeowners insurance, homeowners association dues, and even property taxes!
Helpful Jumbo Mortgage Calculator Terms
- Amortization: A method for paying off debt in installments, using payments that consist of both principal and interest. In most cases, a fixed repayment schedule is agreed upon by both the borrower and the lender, and the amount of interest paid during each interest paying decreases over time. That means that as you go on, a higher percentage of each payment goes to paying off the principal.
- Annual Percentage Rate (APR): The total cost of borrowing a sum of money per year. APR is usually expressed as a percent.
- Down Payment: The initial cash payment you’ll make towards buying a home.
- Interest: The cost of the loan, based on a percentage of the principal amount.
- Loan Term: The length, typically in years, of a loan agreement. The loan term stands as the period of time in which a loan is to be repaid. Some common term lengths for home loans are 15 or 30 year terms.
- Loan to Value (LTV): A figure that represents the ratio of a debt in relation to the value of the collateral involved. LTV is examined by lenders to quantify borrower leverage, and determine the level of risk involved in lending the specified sum. You can calculate LTV using the following formula: Loan Amount / Total Value (of Collateral).
- Principal: The figure that represents the total amount of money borrowed, not including interest.
Pros and Cons of Jumbo Mortgages
Living in a high cost area can force you into a situation where a jumbo mortgage is the best option, but for most buyers, these aren't loans you'll ever need to know about. Nevertheless, here are the pros and cons of opting for a jumbo mortgage.
Benefits of Jumbo Mortgages
- They’re large mortgages for big budget homes. If you want to finance the purchase of a million-dollar house anywhere in the United States, the only way to do it is with a jumbo mortgage. That’s the biggest advantage they offer over any other loan program.
- Often, no mortgage insurance is required. Many lenders won’t ask for mortgage insurance, which is nice. The MI on that kind of loan would be the stuff of nightmares.
- Terms vary wildly. Although many jumbos have similar terms due to competition in the market, there are literally no rules for them. That means banks can have any terms they want. Shop around if you’re looking for a jumbo because you might find a killer deal.
Drawbacks of Jumbo Loans
- Qualifying can be difficult. If your credit score isn’t 700+, you don’t have a load of reserves and your debt-to-income ratio isn’t low, don’t count on being able to qualify. You’ll also need a good sized down, anywhere from 15 to 30 percent of the sales price of the home.
- Fees are often mighty. Since it takes longer and requires more resources to close a jumbo, there are more fees involved. The extra work can add up, especially as little red flags and small problems start to combust and have to be metaphorically doused.
- Oh, and you might need two appraisals. Along with those fees, you’re probably going to need two appraisals: one appraisal to appraise the house, and the other appraisal to verify the first appraisal. This is for the lender’s protection, but you get to pay for it.
Who’s the Ideal Borrower for a Jumbo Loan?
If you’ve read any of the other mortgage pages, you know this section is meant to describe the ideal borrower in detail enough that you can recognize yourself when you see you. It’s a bit silly to do that with a buyer who needs a jumbo, isn’t it? You either need a jumbo or you don’t. But, hey, let’s do it anyway. A borrower for for a jumbo:
- Has a high income that can support a large payment.
Stashes significant funds in both easy to liquidate and longer term instruments.
Takes stellar care of their credit, they probably have a World Mastercard.
Doesn’t mind if it takes a little while to close; they can wait.
In short, jumbo borrowers are people with large financial portfolios, allowing them to make a monthly mortgage payment in the mid-to-high quadruple digits. They come from a huge range of fields and situations, but they all have one thing in common: they want a house that they can’t buy with a conforming loan. It’s really that simple.
How to qualify for a Jumbo Loan
Due to their size and lack of Fannie Mae and Freddie Mac guarantee , Jumbo loans have stricter qualification standards. This is because they are riskier than the smaller conventional loans. Here is what you need to know about qualifying for a Jumbo loan:
- Although it is possible to qualify with a credit score of 680 most lenders start at 700
- To minimize risk lenders may require you to have 6-12 months in reserves for payments
- The preferred debt to income ratio is in the lower range of 36-43%
- The target borrower usually earns $250,000-$500,000 per year
Due to the size of the Jumbo loan and lack of guarantees, the lender may also require more paper work than for conforming loans. So you must be prepared to jump through a few hoops.
Jumbo Loans: In Review
Whether you’ve won the lottery or you’ve inherited your fortune from your long lost great aunt, if you want to buy a house worthy of a king with a loan, you’ll need a jumbo mortgage to do it. Polish your credit like it’s the good silver, put plenty of cash back for a down payment, and be ready for the process to take a while, because chances are good that it will. After all, the bank won’t let go of that much money easily. But once it’s all over, you’ll be the one relaxing by the pool and those bankers will still be stuck in their cubicle farm, so who’s really the winner here?
There aren’t a lot of situations that call for a jumbo mortgage, but it’s one of those things that you need when you need it. For those times, and all the others, home.loans is here to help answer all your mortgage questions -- jumbo or otherwise. Contact us today, it’s free and you’ll give us something to do besides debate over whether that infamous dress is black/blue or white/gold (only a couple of us are in the white/gold camp. I'm looking at you, Victoria).