When a property is too expensive to be financed by a conventional conforming loan, borrowers opt for a jumbo loan. The purpose of a jumbo loan is to finance homes that exceed the local conforming loan limit as stipulated by the Federal Housing Finance Agency (FHFA). Jumbo loans are also called non-conforming conventional mortgages and are not protected from losses if the borrower defaults, making them risky for most lenders. Due to the high risk associated with this type of mortgage, jumbo loans are made available with either an adjustable rate or fixed interest rate and have varying terms.
How Do Jumbo Loans Work?
If you have your eyes set on a specific home only to find out that it costs more or close to half a million dollars, the first question that comes to mind is, do I have the money? A jumbo loan can help, especially if you do not have the funds in your account. However, unlike conventional loans, borrowers are subjected to a more rigorous credit assessment process. This is because of the risk associated with it.
Getting approved for a jumbo loan requires having a stellar credit score beyond 700 on the credit score scale. Borrowers are also required to have a low debt-to-income ratio (DTI). Most lenders prefer a debt-to-income balance that’s under 43% but close to 36%. Even though jumbo loans are considered non-conforming mortgages, they still fall within the Consumer Financial Protection Bureau guidelines. This ensures that the jumbo loans are governed by a specific system, with standardized rules and terms for a qualified mortgage.
Borrowers who opt for a fixed-rate mortgage of 30 years
must have cash in hand to cover the higher payments than conventional mortgages. In addition, lenders require all borrowers to have W2 tax forms for two years and thirty days of pay stubs. The income terms become stricter for self-employed borrowers, with sixty days of current bank statements and two years of tax returns.
Jumbo loans also require borrowers to have liquid assets and cash reserves equal to half a year of the mortgage payments. Like other loans, applicants must have proper documentation of loans held and show proof of ownership for non-liquid assets like real estate.
What is the Loan Limit for Jumbo Loans?
The Federal Housing Finance Agency has set the loan limits in the year 2021 to $548,250. This limit is usually higher in areas where the median cost of a home exceeds this amount. If this is the case, borrowers get conforming loans of up to $822,375, which depends on the limits set by their respective counties.
Any loan that exceeds the county’s conforming loan limit prompts the acquisition of a jumbo loan, allowing borrowers access to higher loan limits. Jumbo loans are harder to qualify for and require applicants to meet specific requirements such as paying a more significant down payment and higher credit score than regular loans.
If you meet all these requirements, then a jumbo loan is likely to benefit you. However, before commencing the home buying process, it is essential to familiarize yourself with the loan limits in your area.