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Jumbo Mortgage Loan – We’ve talked a lot about discount mortgage programs on the Moreira Team Blog recently. FHA loans, VA loans and USDA loans are all great mortgage products for first-time home buyers and lower income borrowers. Now, it’s time to shift to the other side of the spectrum and talk about jumbo mortgages.
What is a Jumbo Mortgage?
Jumbo loans are larger than average mortgage loans that don’t fall under conforming loan standards. They are designed for larger home purchases, most commonly sought after by move-up buyers who are looking to buy their dream homes.
A conforming loan is one that is backed by government financing entities such as Fannie Mae and Freddie Mac. They are insuring these traditional mortgage loans, and thus the mortgage lenders are assuming less risk with these smaller-to-average size home loans. As the name would imply, conforming loans are required to conform to specific lending regulations and must fall within a limited price range.
Conforming Loan Limit
The conforming loan limit (CLL) is adjusted each year by the Federal Housing Finance Agency (FHFA). In 2021 most counties have a maximum conforming loan limit of $647,200. Some higher-income counties in other parts of the country will have higher CLLs. Any mortgage loan over this conforming loan limit will be considered a non-conforming “jumbo” mortgage loan.
As you might expect, jumbo mortgage loans are subject to different rules and qualification requirements. Lenders are typically assuming more risk with these larger loan amounts, so they are going to be more discerning about who they lend to. Higher credit ratings, higher down payments, lower debt-to-income ratios and higher income will help jumbo loan borrowers secure better mortgage rates and terms.
Down Payment Options
Though a larger down payment (often coming from the sale of another house with a healthy amount of equity built up) is encouraged, it is not always absolutely necessary with a jumbo mortgage loan. It’s a common misconception that you need to put down at least 20%. With a little creative financing, however, you may be able to get approved for a jumbo loan with as low as 5-10% down. This is achieved by getting a first mortgage within the current conforming loan limit and then securing a second mortgage for the rest of the balance. This is what we call a “combo loan” that allows borrowers to get jumbo loan amounts with lower fixed-rate mortgage payments, while also avoiding the need for private mortgage insurance (PMI).
Pros and Cons of Jumbo Mortgages
There are several advantages to getting a jumbo mortgage loan. The obvious one is the ability to qualify for a larger loan amount that allows you to buy a better house and/or larger property. Some jumbo loans may even offer better interest rates, depending on how the financing is worked out. If you are a high-income earner with a good credit history, you are a good candidate for a jumbo loan. A high down payment is helpful, but not necessary as we described earlier.
On the downside, it is important to remember that jumbo mortgage loans are not guaranteed by the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA) like FHA or VA loans, respectively. If your jumbo loan is split over multiple loans, the conforming part of the loan will still be backed by Fannie Mae and/or Freddie Mac.
Jumbo Mortgage Qualification Standards
No matter how you work your financing, qualifying for a jumbo loan is much tougher than it will be for a traditional conforming loan. You will need to prove a good credit rating and solid income. You will typically have to show at least 6 months of mortgage payments in an asset account, as well. For loans above $5 million, you may be looking at what’s considered a “super” jumbo mortgage, and that may be subject to its own requirements (including dealing with a portfolio lender rather than a traditional mortgage broker).
Here are some basic requirements to expect for jumbo loan qualification:
- Monthly mortgage payment not to exceed 36% of total income
- Strong financial history
- Current employment and/or self-employed income proof
- Credit score of 680 or higher
- Down payment of at least 20% will help, but may be avoidable with creative financing
- Cash reserves displaying at least 6 months’ worth of mortgage payments
- Sales price over $647,200
If you are looking to move up into your dream home and want to explore your jumbo mortgage loan options, contact Moreira Team today for expert advisement and access to different jumbo mortgage solutions.