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What Are Jumbo Loans and How Do They Work?
Featuring Guest Author: Crystal Schulz, Loan Officer
What Are Jumbo Loans?
When looking around for your first or next home, you may come across one relatively set at a higher price than other homes in the area. Depending on your budget, a higher-priced home may call for a higher dollar amount to lend, turning it into a jumbo loan. Before you get started on a mortgage application for this situation, you should know about jumbo loans and how they can affect you as a homebuyer.
You may be wondering, what is a jumbo loan? How do jumbo loans apply to me? A jumbo loan is exactly what it sounds like. It is any home or property loan that is over the conforming loan limit, even as little as $1 over! Loan limits change every year and vary by county, more discussed later.
Jumbo loans may sound complex since they have a completely different set of underwriting and requirements than conforming loans, but don’t let this stop you from dreaming big! In this article, we will talk about how jumbo loans work and what jumbo options are available so that you can pursue your ultimate dream home without any roadblocks.
Jumbo Loans and Loan Limits
Understanding loan limits and how they apply to your financial goals will help you decide if a jumbo loan is needed. Loan limits are also known as conforming loan limits. According to fhfa.gov, Fannie Mae and Freddie Mac, federally backed home mortgage companies created by Congress, are restricted by law to purchase single-family mortgages with origination balances below a specific amount, known as the conforming loan limit. Loans above this amount are known as jumbo loans.
Since loan limits vary by county, you may be qualified for a conforming loan in some counties but not in others, allowing you to consider a jumbo loan. FHFA updates the loan limits every year and can be publicly accessed here. If you’re thinking about buying a high-priced home and don’t know if you will go over the loan limit, this is your best resource to compare county loan limits. When talking to a lender, let them know upfront what county and state you plan on buying a home in. They will know if you qualify.
One thing to note is that if you plan on going down the jumbo route, the qualifications also vary across investors who allow it. Just because you are turned away from a big box bank for a jumbo loan, doesn’t mean that other lenders in the area will do the same. At RWM Home Loans, we want to support all your homeownership goals, big or small. With a choice between fixed or adjustable rates, our jumbo loans offer maximum flexibility for home financing on larger loans.
Jumbo Loan Options
Any loan over the conforming loan limit is a jumbo loan. Most banks will have jumbo loan options while some mortgage brokers and bankers can access jumbo loan options that are outside of the box when compared to their big bank counterparts. What jumbo loan options do you have?
Big Bank Jumbo Loans – These will be your most challenging to obtain. These are usually paired with the least expensive interest rates and most attractive pricing. They come with the heaviest guidelines too. While many conforming loans will allow up to a 50% debt to income ratio, big bank jumbo loans max out at a 43% debt to income ratio. Typically, a credit score of 760 is favored, but some will allow for a lower score depending on the investor. Income and credit are also known to be more scrutinized. If you qualify and this loan meets your needs, then it’s likely the best financial choice for you.
Non-QM Jumbo Loans – Are you self-employed, or do you plan to buy your next home as an investment? There are non-qualified mortgage programs for borrowers outside of the bigger banks’ jumbo loans that provide solutions for your purchase. Talk to your loan officer about how to qualify. These loans are paired with a higher-than-market rate and discount or origination points.
Low Down Payment Jumbo Loans – If you’re a homeowner who is carefully budgeting for a high-priced home, there are jumbo loans that will allow you to put as little as 5% down! Your best bet is to plan on having a relatively high credit score, substantial income, cash reserves, and a slightly higher rate than your par market rate. These also are paired with origination or discount points.
Purchase, Refinance, Cash-Out Refinance – Your jumbo loan can be used for purchasing, refinancing, or a cash-out refinance. Your lender will be able to share what the requirements look like for you.
Home Equity Line of Credit – Sometimes, it will make sense to use a conventional loan paired with a Home Equity Line of Credit, or HELOC, to reach your desired loan limit and the down payment requirements.
Consult with your loan officer about all the options in financing your home before committing to a specific loan.
Qualifying for a Jumbo Loan
Jumbo loans are obviously for a higher loan amount, hence the word jumbo. In most cases, these loans are underwritten more rigorously. For many of your standard jumbo loans, they will vary from conventional loans in these ways:
Down Payment – A down payment of 20% is usually required, depending on the investor.
Debt-to-income Ratios or DTI – The debt-to-income totals are likely required to be less than 43%. If you are self-employed, certain investors may limit the DTI as low as 35%.
Rates – Rates vary, sometimes more and sometimes less than conventional rates.
Credit – Typically does not allow for any non-mortgage debts to be paid off during the loan process & will use monthly payments and account balances as they are reported on your credit report. They may have longer wait times for prior credit events like bankruptcy, short sale, and foreclosure.
Reserves – Reserves are the additional assets that will be available after your close on the mortgage. The requirement typically varies between 6 months, 12 months, or 18 months of the new monthly mortgage payment. Additional reserves may be needed depending on your scenario.
There are options for higher loan amounts with a lower down payment, but these are special programs and non-QM loans, not your standard big-box jumbo loan. There are also special programs that may be more lenient on debt-to-income ratio, down payment, or cash reserves. However, these are usually paired with a higher rate. As always, discuss with your lender what option is most suitable for you.
Jumbo Loans Beyond Homeownership
Crystal Schulz, a community-based mortgage advisor in Las Vegas, has worked on several home loan options to provide the best experience for her clients. Some of them are conventional, FHA, refinances, and even jumbo. Having worked with multiple jumbo loans, Crystal knows that it’s more than just purchasing your dream home.
Let’s say that you have a first mortgage and a HELOC used to improve your home or a second mortgage, or you might dream of finishing your yard or redoing your kitchen. A cash-out refinance using a jumbo loan is a possibility and a problem solver in many instances. Recently I helped a client refinance his first mortgage, a HELOC, and car loan to get about $200k in cash out using a jumbo loan and the newly appraised value. Jumbo loans may solve problems and get you into the home of your dreams. – Crystal Schulz
Obtaining a jumbo loan is not a one-way path. Once you decide this option is right for you, there are still several ways to take advantage of a jumbo loan and make it work for your end goal. Let us figure out the complexities so you can continue to pursue your dream home.
Dream Big with Jumbo
Don’t think your dream home is within reach? Well, think again. Jumbo loans have helped several homeowners cross that threshold of being unable to qualify. With this loan option, you can continue to pursue your dream home while we take care of the rest.
Saving up for a down payment on a jumbo loan can be difficult. Luckily, we have a few ways that you can save for a down payment and be one step close to reaching your financial goals. If you’re ready to get the jumbo loan process started, don’t hesitate to reach out!
Financing details are for educational purposes only. All views and opinions do not constitute financial or legal advice and reflect requirements at the time of publication. Rates, program terms, fees, and conditions referenced are subject to change without notice. Not all products are available in all states for all amounts. All mortgage applications are subject to underwriting guidelines and approval. This is not an offer of credit or a commitment to lend. Residential Wholesale Mortgage, Inc. dba RWM Home Loans is an equal housing lender licensed by the CA Department of Real Estate #01174642 and CA Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act. NMLS# 79445