Jumbo loans are designed to finance luxury properties and homes that are located in highly competitive local real estate markets.
A jumbo loan, also known as a jumbo mortgage, is a type of mortgage that exceeds conforming loan limits set by the Federal Housing Finance Agency (FHFA). A jumbo loan is not eligible to be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac, unlike conventional mortgages. Jumbo loans are designed to finance luxury properties and homes that are located in highly competitive local real estate markets. They come with particular underwriting requirements and tax implications.
The value of a jumbo loan can vary by state, even by county. Though it changes infrequently, the FHFA sets the conforming loan limit size for different areas on an annual basis. The limit was set at $484,350 in 2019 for most of the country. That was an increase from 2018 which was $453,100.
There is a different set of provisions made by the FHFA for areas that are outside the continental USA for loan limit calculations. For instance, the baseline limit for a jumbo mortgage in Alaska, Hawaii, Guam, and the U.S Virgin Islands as of 2019 is $726,525. However, in counties that have higher home values, that amount may be actually higher.
How Does a Jumbo Loan Work?
If you are interested in purchasing a house that costs close to half a million dollars or more and you don’t have a lot of money in your bank account, you will likely need a jumbo mortgage loan. If you are trying to get one of these loans, you will face much more meticulous credit requirements than someone applying for a conventional loan.
Since 2008, the minimum requirements for a jumbo mortgage have become increasingly strict, just like traditional loans. In order to get approved, you will need to have an exceptional credit score, 700 or above, as well as a low DTI (debt to income) ratio. Your DTI should be under 43% and preferably closer to 36%. Even though jumbos are nonconforming mortgages, they must fall within the guidelines of what the Consumer Financial Protection Bureau considers a qualified mortgage.
You will need to show that you have cash available to cover your payments. These are likely to be high if you are opting for a standard 30-year fixed-rate mortgage. You will also need to provide 30 days of pay stubs and W2 tax forms going back over a 2-year period. If you happened to be self-employed, the the requirements are greater. You will nee to provide 2 years of tax returns and at least 60 days of current bank statements. In addition, you will need to provide a provable list of liquid assets to qualify and a cash reserve that is equal to 6 months of the mortgage payments. Finally, you will have to provide proof of ownership of any non-liquid assets and proper documentation on any other loans held.
Jumbo Loan Rates
In the past, jumbo loan rates used to carry higher interest rates than that of conventional mortgages. However, the gap between the two has been closing in recent years. The APR, or annual percentage rate, for a jumo mortgage today is often about the same as a conventional loan, in some cases it’s actually lower.
Jumbo mortgages are often securitized by other financial institutions because government-sponsored enterprises can’t handle them. Since they carry a higher risk, they trade at a yield premium to conventional securitized mortgages.
Down Payment for a Jumbo Mortgage
Over the same time period, down payment requirements have loosened. Jumbo loan lenders in the past, often required buyers to put up 30% of the purchase price, compared with 20% for a conventional loan. In recent times, the figure has fallen as low as 10% to 15%. There are a number of advantages to making a larger down payment, one of which is to avoid the cost of private mortgage insurance.
Should You Take Out a Jumbo Loan?
The amount you can borrow depends on several factors: your credit score, your assets, and the value of the property you want to buy. Jumbo loans are typically considered most appropriate for people who earn higher incomes, those who make between $250,000 and $500,000 a year. This segment of earners is known as HENRY. This stands for high earners, not yet rich. HENRY refers to people who make a lot of money annually but who haven’t yet accumulated millions in extra cash or in other assets.
However, just because you can take out a jumbo mortgage doesn’t necessarily mean you should. For instance, you shouldn’t do it if you’re counting on it giving you a substantial tax break.