A jumbo loan is not a term most people are familiar with. Yet there are times when a jumbo loan is the perfect fit for your home financing needs.
Before you decide whether a jumbo loan is the right loan vehicle, it is helpful to be aware of how jumbo loan terms and requirements can differ from one county to the next. It is equally important to understand how to prepare yourself for success when seeking a jumbo loan approval.
In this article, learn what you need to know about jumbo loans to take the next step and seek this type of home financing.
Jumbo Loan: Defined
A jumbo loan today is also called a jumbo mortgage and a non-conforming mortgage. The name is fairly self-descriptive. Basically, a jumbo loan exists to finance homes priced above what the conventional mortgage loan limit (Freddie Mac and Fannie Mae) is designed to accommodate.
For comparison purposes, let’s take a look at conventional mortgage loan limits nationwide. According to Bankrate, the United States is divided into 3,143 counties. 2,916 counties limit conventional mortgage loans to $417,000 or less.
108 additional counties have a limit of $625,500. 115 counties have limits that fall between $417,000 and $625,500. And four counties (all in Hawaii) have limits ranging from $657,800 to $721,050.
Here, you can see that the conventional mortgage loan limit relates to average housing costs in different counties. Some counties have higher housing costs than other counties, and in the former category, loan limits are also higher.
Where Jumbo Loans Enter In
But what if you wanted to purchase a home that is priced higher than the conventional loan limit in your county? You can’t get sufficient loan financing via government-financed loan entities (90 percent of all home loans are issued this way).
So what you need is a jumbo mortgage. In most cases, if you are looking at a home priced above $417,000, you are looking at what is considered a “luxury” or “high end” property. Often these property types are priced at $500,000+, plus you may need financing to cover closing costs, renovations, or homeowners insurance premiums.
Here, a jumbo mortgage is definitely the financing vehicle you need. Now you just have to qualify for it!
How to Qualify for a Jumbo Loan
While these requirements may vary somewhat based on the sticker price of the home you wish to purchase, this list from Investopedia outlines general starting requirements to qualify for jumbo mortgage financing:
- Excellent credit. A score of 700+ is typically required just to get your foot in the door. If you can score at 720 or higher, you have a better shot at being approved.
- Proof of income consistency. Tax returns, W-2 forms, or similar evidence plus proof of sufficient liquid assets (6 to 12 months’ worth of mortgage payments) will generally be requested up front during the application process.
- Debt to income ratio (DTI). Your lender will look closely at your debt to income ratio to ensure the addition of a jumbo mortgage will not predispose you towards default. For conventional mortgages, generally the most desirable DTI is 43 percent or lower. You may find your DTI needs to be lower still to qualify for the jumbo version.
- Down payment. In the case of down payments, you will find standards to be more relaxed. Some lenders may be willing to accept a down payment as low as 10 percent when granting a jumbo mortgage, while others may still require 20 percent or higher.
Interest Rates for Jumbo Loans
Jumbo loans generally offer comparable interest rates with conventional mortgage loans. However, where issues can begin to arise is when that time comes each year to file your annual income tax returns.
The IRS only allows homeowners to deduct interest paid on mortgage loans up to a certain amount, which currently is set at $1.1 million per person.
If you are purchasing a home with a partner and the two of you are not married, you may each be able to write off $1.1 million worth of interest paid on your jumbo mortgage. If you are married and purchasing a home using a jumbo mortgage, however, you will be capped at $1.1 million.
In all things tax related, it is always best to consult with your certified public accountant for the latest IRS regulations and requirements.
When shopping for a jumbo loan, it is advisable to seek at least three to five quotes to compare before making your choice. As well, look closely at the interest advantages of fixed versus adjustable rate mortgages to see where you will pay the least interest over the course of your jumbo mortgage loan.