What is a Jumbo Loan primarily used for, and why is it called Jumbo? In a nutshell, Jumbo Loans offers financing opportunities for property types that do not meet conforming loan eligibility requirements. When a property exceeds the conforming loan limit set by the Federal Housing Finance Agency (FHFA), buyers cannot meet eligibility for conventional financing. As a result, Jumbo Loans are also known as non-conforming mortgages because they don’t conform to these limits; they offer homebuyers and investors alternative financing solutions for more expensive properties.
Why were Jumbo Loans created?
As a result of the Great Depression and the catastrophic financial fallout, leading to the decline of American quality of life, the Federal Housing Authority (FHA) originated mortgages to offer solutions to assist citizens in financing properties they could not outright pay for. On June 27, 1934, Congress adopted the National Housing Act, establishing the Federal Housing Administration (FHA). In addition to FHA loans, many different mortgage loan products hit the market, and the Jumbo Mortgage Loan gained traction and popularity since it allows buyers to purchase high-dollar property. Surprisingly, Jumbo Loans are among the most popular property-financing solutions to this day.
The 8 Essential benefits of choosing a Jumbo Loan.
- Tax advantages: In some cases, the interest on a jumbo mortgage loan may be tax-deductible, placing it well ahead of the competition.
- Competitive interest rates: Although it is common for Jumbo Loan rates to historically sit slightly higher than conforming loans, they can still be competitive. Loan rates vary based on certain factors, including credit score, the type of mortgage, and lender choice.
- Luxury home financing: Jumbo loans are perfect for financing property in upscale, popular neighborhoods and provide luxury home financing opportunities,
- Customizable loan terms: Borrowers can choose a repayment plan that meets various financial goals. Jumbo loans offer expedited equity build-up by offering shorter-term loan options. Additionally, for lower monthly payments, longer-term loans are beneficial.
- Flexibility: Jumbo loans offer 15- to 30-year fixed-rate mortgages or 3- to 10-year adjustable-rate mortgages for qualifying borrowers.
- Higher loan amounts: Simply put, borrowers can access more money, making purchasing high-value property in an expensive housing market accessible.
- Portfolio lending: Some lenders retain jumbo loans in their portfolios rather than selling them on the secondary market, leading to more personalized underwriting and greater flexibility in approving borrowers.
- Non-conforming property types: Occasionally, some property types won’t meet standard conforming loan requirements. Jumbo loans offer lending solutions.
Aspects of Jumbo Loans to consider.
It’s important to note certain disadvantages and considerations when choosing a Jumbo Loan. Because Jumbo loans can be riskier for lenders since Fannie Mae and Freddie Mac won’t guarantee the property, Jumbo Loan lenders are not protected from losses if a borrower defaults; therefore, stricter credit requirements and more substantial down payment requirements are required. As a result, buyers may encounter challenges in finding a lender willing to offer jumbo financing.
Additionally, increased loan amounts often bring higher monthly mortgage payments and increased interest costs over the life of the loan. Consequently, it is highly advisable to thoroughly evaluate not only one’s personal financial situation but also to explore all available mortgage options to determine which loan product best suits each financed property.
What is a Jumbo Loan’s primary benefit over a conventional loan?
The bottom line is that borrowers can access more money. As a rule, property value is determined based on the appraised value compared to similar surrounding property. Accordingly, the FHFA sets loan limitations on conforming loans based on the appraised value median across the nation, and the exact limit can vary from county to county. As a solution for buying a property with a higher value, buyers depend on non-conforming loan options.
For example, in 2023, a jumbo loan for a single-family home in most parts of the U.S. is any loan greater than $726,200. All things considered, housing prices in most cities, specifically in desirable neighborhoods, far exceed the FHFA limit. In these situations, a non-conforming loan like a Jumbo Loan is an ideal solution.
Commonly, Jumbo mortgage lenders set specific loan limits; these vary by lender but range from the standard conforming loan limit upwards of multi-million dollars for a single-unit property. Real estate in higher cost-of-living locations, such as the city center of San Francisco or New York, will exponentially cost more than the FHFA housing limit. Hence, a Jumbo Loan option is a popular loan type to consider. Additionally, high-end borrowers can fund desirable vacation properties, investment homes, and multi-million dollar investments through various non-conforming loans.
Median home values generally increased in high-cost areas in 2022, driving up the maximum loan limits in many areas. The 2023 ceiling loan limit for one-unit properties in the highest-cost areas, such as Alaska, Hawaii, Guam, and the U.S. Virgin Islands, is $1,089,300, or 150% of $726,200. –Investopedia
What is a jumbo loan’s eligibility criteria?
Jumbo loans have stricter requirements than conventional mortgages that conform to FHA guidelines. For this reason, borrowers need to prioritize financial credibility, including timely credit card payment history, car finance loans, and any revolving credit.
Here is a list of Jumbo Loan requirements for qualifying borrowers.
- FICO credit report proving a higher credit score than 700.
- A Debt-to-income ratio (DTI ratio) lower than 43% and ideally closer to 36%.
- Cash Reserves to cover upwards of one year’s worth of mortgage payments and provable liquid assets.
- Down payment requirements and closing costs: If borrowers put down less than 20% of the purchase price, expect the added cost of private mortgage insurance (PMI) in the monthly mortgage payment.
- In-depth personal finance documentation: 2-3 years’ tax returns, 2-3 years’ W-2 statements or 1099 statements, bank statements, and a portfolio listing investment accounts and other assets.
What is a jumbo loan’s key advantage when buying a luxury home?
Jumbo Loans allow financing opportunities for inflated markets and properties that exceed the FHFA conforming loan limit. For example, when a buyer wants to purchase property on the beaches of Hawaii or the last frontier of America in beautiful Alaska, these vacation homes and luxury properties come with a hefty price tag.
Subsequently, the asking price may supersede the FHFA conforming loan limit, yet the buyer knows the property’s value is a worthy investment. As a solution, jumbo loans provide funding in high-cost areas where FHA loans will not justify higher home prices or housing market hot spots. Expressed simply, the key advantage to using a Jumbo Loan to finance luxury property is that Jumbo Lender’s loan products are ideal solutions for high-ticket homeowners and investment property financing.
What is a Jumbo Loan’s average interest rate?
Since lenders set their own nonconforming jumbo loan limits, it’s in your best interest to shop lenders to compare rates and terms. Interest rates have many variables depending on eligibility requirements, down payments, credit scores, and various other components. Additionally, offerings of adjustable-rate mortgages and fixed-rate opportunities all play in.
Loans come in all shapes and sizes, and so do lending opportunities. When it comes to lending, whether a borrower is looking to refinance with a HELOC or invest in a new loan term by refinancing to leverage the home’s value, researching lenders and finding a professional, experienced lender is crucial.
While jumbo mortgages used to carry higher interest rates than conventional mortgages, the gap has been closing in recent years. Today, the average annual percentage rate (APR) for a jumbo mortgage is often par with conventional mortgages—and in some cases, actually lower. As of July 21, 2023, Wells Fargo, for example, charged an APR of 6.699% on a 30-year fixed-rate conforming loan and 6.341% for the same term on a jumbo loan.3 –Investopedia
What is a Jumbo Loan? Now that you know, let’s connect you with a lender that can help.
The steps are simple:
1. Schedule a Call: An experienced loan officer can discuss your needs and guide you through the possibilities.
2. Get Approved: We’ll help you through the application process and facilitate the steps for approval.
3. Exhale: Put your feet up and feel secure knowing you made the best decisions about your home loan.
With proper guidance, you can get your first home, accommodate your growing family, and start that renovation project—whatever goal is on the horizon. An alliance with Mortgage Insiders will give you the confidence to know that your mortgage loan is setting you up for financial success. Mortgage Insiders offers today’s latest financial news and mortgage trends. Check out their channel for current events.
