Homebuyers wishing to finance high-value properties are required to obtain a jumbo loan. This type of loan is needed when the amount being financed exceeds the Federal Housing Finance Agency’s (FHFA) conforming loan limits. This conforming loan limit varies by region.
For most parts of the country, a conforming loan must fall beneath $806,500. However, areas such as New York City and San Francisco have a conforming loan limit of $1,209.750. Anything higher than that and a jumbo loan must be obtained. Borrowers are often unaware of their loan options when they need a non-conforming loan, which can result in higher costs in the long run. They need to know how to obtain a competitive rate and favorable terms.
What is a Jumbo Loan?
A jumbo loan is a non-conforming financial product, making it ineligible for purchase by Fannie Mae or Freddie Mac. Luxury homes and properties in high-value markets often require a jumbo loan because their home prices exceed the loan limits established by the FHFA. Lenders take on higher risk with these loans because they remain on their books. They cannot be sold to a government-sponsored entity.
Jumbo loans have stricter eligibility criteria. Most lenders require a borrower to have a credit score above 700 to approve the loan. Their debt-to-income ratio has to be below 43 percent, and they must have substantial cash reserves. They need to have a minimum of 12 months’ worth of expenses saved to qualify. Furthermore, the down payment required may be anywhere from 10 to 30 percent of the home’s asking price.
Competitive Rates
Banks charge higher interest rates for jumbo loans because they take on increased risk, but that isn’t always the case. Jumbo loan interest rates may drop below conforming loan rates, depending on market conditions and lender competition. However, banks often don’t share this information, and borrowers are the ones who pay. A .25 percent rate reduction could lead to tens of thousands of dollars of savings over the life of the loan.
Hidden Strategies
Buyers should compare multiple lenders to find the best rate. Lenders have flexibility when setting terms for these loans, and borrowers often find they can save thousands by getting quotes from multiple lenders. Look beyond traditional banks to credit unions and online lenders. Origination fees may be waived, or a person might choose an adjustable-rate mortgage with a lower rate. The rate will change after the initial period based on the index selected by the lender. Many lenders use the Secured Overnight Financing Rate (SOFR).
Alternatives
Borrowers should look into specialized jumbo loan programs that may ease qualification requirements or lower costs. VA jumbo loans are available for service members and veterans. They typically require no down payment and have flexible credit requirements. Non-qualified jumbo loans don’t adhere to Consumer Financial Protection Bureau rules and come with higher rates, but certain buyers find them perfect for their needs.
Pitfalls
Closing costs for jumbo loans can be extremely high, running tens of thousands of dollars. Extensive documentation is often required, which can extend the approval process time, and lenders often require manual underwriting. They look at the borrower’s financial history closely. A borrower can increase the odds of approval by boosting their credit score and reducing their debt-to-income ratio.
Borrowers benefit greatly from using the strategies outlined above. Be proactive. Research lenders, loan terms, and interest rates to find the right financial product. Those who do find they have a high-value home they love without additional financial burdens.
