A jumbo loan exceeds the federal government’s conforming lending limit. This type of loan can be used for the purchase of permanent residences, investment properties, and holiday homes, among other things. And just like other conventional mortgage loans, jumbo loans have a similar payment plan and element, except for its stipulations.
Jumbo loan’s maximum lending limit varies by lenders and location and due to its small market size its qualification requirement may be stringent and one may have to look around longer to find a mortgage company that offers it.
Limits on Jumbo Loans
If you are seeking a huge loan that exceeds the lending limit for your locality, a jumbo loan is your best bet. As previously mentioned the cap for jumbo loans is dictated by the geographical location, you may have to get the loan in a region where the limit fits your need.
Countrywide the conforming loan ceiling for Fannie Mae and Freddie Mac is $548,250 for 2021, while in more expensive places, borrowing restrictions are higher. For example, the loan limit for 2021 in California, New York, and Washington, D.C. stands at $822,375 and Alaska and Hawaii have loan limitations of $822,375.
Rates on Jumbo Loans
Jumbo mortgage interest rates fluctuate and might be higher or lower than conforming mortgage interest rates, ranging from 3.42% on a 30-year loan compared to a conventional fixed rate of 2.96% in Dec 2020.
The Perks of a Jumbo Loan
Borrowers gain most from jumbo mortgages since they permit them to borrow more than what government-regulated mortgage companies allow. A jumbo loan, for example, allows you to draw a loan of $1 million against a home worth $1.5 million.
Also, the jumbo mortgage is a useful financial tool and part of an overall investment strategy for some borrowers who wish to finance more of the home’s cost rather than putting up cash. This enables a potential mortgage holder, get a good deal on a mortgage and buy the house of your dreams without worrying about the conforming mortgage dollar limit.
How to Get a Jumbo Loan
Jumbo lenders have tougher underwriting standards than ordinary lending, majorly because of the risk, it poses for lenders. This type of loan puts the lenders at risk for potential loss since they are not supported by Fannie Mae or Freddie Mac(government regulated).
Meanwhile, on the flip side, lenders stand to benefit more because the loan’s financial value is bigger, and the lender has the potential to market additional services to these more affluent customers. However, hurdles borrowers must overcome before gaining access to this loan approval includes having larger income criteria, higher credit scores, and larger reserves.
Borrowers with low debt-to-income ratios must compensate for it
Getting a jumbo loan may be a hard nut to crack if your credit score is low, so you should have reserves of liquid assets that could cover up to a years’ mortgage payment, aside from the required 10- 20% down payment of the purchase price.
Borrowers should therefore have enough reserves, or liquid assets, to cover six to twelve months of mortgage payments. A jumbo loan usually requires a down payment of 10% to 20% of the purchase price.
It would be recalled that during the first wave of the coronavirus pandemic, there were stories of lenders avoiding jumbo mortgages to avoid unnecessary losses. However, the housing market exploded this summer and fall and for the first time in a long while, mortgage experts can categorically say the jumbo loan market has returned to normalcy.