Jumbo Loan- What is It and How Does It Work

1. Jumbo Loan: What is It and How Does It Work? Do you intend to buy a luxury home or high-end property, but the conventional mortgage limit is less than what you need? Consider applying for a jumbo loan. What is It? It is a mortgage loan thatcovers a larger amount than a conventional mortgage. A jumbo loan surpasses the limits set by the government-sponsored agencies Fannie Mae and Freddie Mac. How Jumbo Loans Work A jumbo loan has a higher down payment than conforming loans and has more strict underwriting rules. You can apply for a jumbo loan when purchasing a mansion or a home in high-priced regions that you cannot finance from a conventional mortgage. A jumbo loan is ideal for buying vacation homes or investment properties. Like a traditional mortgage, jumbo loans have requirements you should meet, loan terms, and a predefined repayment schedule. It can also have a fixed or adjustable rate. Since the government doesn’t restrict the property you can buy using the funds, you can use the jumbo loan to buy the property of your choice. Qualifications for a Jumbo Loan Would you like to apply for a jumbo loan? Here are some requirements you should meet: Have a high credit score- unlike conventional mortgages, you need a higher credit score to apply for a jumbo loan. Most lenders need borrowers to have a credit score of 740 and above, although some could settle for a 660 score. Always check with the mortgage company. Large income- to successfully qualify for a jumbo loan, you need to have a large income. Your debt-to-income ratio should be low unless you have considerable reserves. Provide documentation-since jumbo loans are not guaranteed by Fannie Mae or Freddie Mac, they are riskier. Therefore, the lender is not protected in case the borrower defaults. So, lenders will ask for documents providing your financial ability and health when applying. They might ask you to hand over 1099s, W-2s, full tax returns, bank statements, and investment accounts. Have sizeable reserves- when applying for a jumbo loan, most mortgage providers will ask for a down payment of 10 to 20%. Therefore, you need adequate reserves or liquid assets to pay the down payment and cover the mortgage payments.

2. Differences between a Jumbo Loan and a Conforming Loan There are several differences between a jumbo and a conforming loan. The main differences are: Loan Rates Jumbo mortgages have fluctuating interest rates which are mostly higher than conforming loans. The interest rate will, however, depend on your lender and current financial situation. It is important to shop around and get a lender which competitive rates. Security Fannie Mae and Freddie Mac secure conforming loans, and the lender is protected should the borrower default on the mortgage. Unfortunately, jumbo mortgages exceed the limit set by these government-sponsored agencies and, thus, are not secured. Down payment You will need to pay a hefty down payment for a jumbo loan compared to a conforming loan. Usually, the lender will ask for a 20% down payment and nothing less than 10%. Loan Limit A jumbo loan has a higher loan limit where you can borrow if you want to buy an expensive property. The loan limit for a conforming loan tends to be lower, although it can be slightly higher depending on the location. Closing costs Jumbo loans are bigger compared to conforming loans. Therefore, you need to meet some additional requirements to qualify, and you can expect to pay higher closing costs and fees. Take Away A jumbo loan can make it possible to own a luxury property or buy a home in a high-end location. Fortunately, jumbo loans are getting more accessible and easier to qualify for. Ready to apply? Get your free jumbo loan quote today!