Financing your forever home: 3 keys to jumbo loans
Looking to purchase a slice of high-value real estate? Whether you’ve outgrown your starter home or have the means to live large and in charge, a jumbo loan can help you afford a whole lot of house. To determine whether an extra-large mortgage is right for you, consider a few key facts unique to jumbo loans. Your forever home awaits!
Jumbo loans: 2018 edition
So what exactly is a jumbo loan? Jumbo—or non-conforming—mortgages are needed for loan amounts over the current conforming loan limit of $453,100 in most areas and $679,650 in high-cost areas like New York City, San Francisco and Los Angeles. Where is the highest conforming loan limit in the country? Honolulu. Property values are so steep in the Hawaiian capital that only mortgages above $721,050 are given jumbo status!
In the past, jumbo loans often entailed 30% down payments and higher interest rates. Not anymore. Rising home values have pushed many traditionally middle-class homes into jumbo territory. Heightened demand and a strong investor market has lowered interest rates—and some lenders now offer fixed or adjustable rate jumbo financing options for as little as 5-10% down.
What does this mean? Non-conforming loans have become an increasingly viable option in many parts of the country. If your financial situation is on the upswing, a jumbo loan can help you bypass a starter home and move in to the full-size home of your dreams. Now that you have some background info, let’s move on to three notable differences between jumbo and conforming loans.
1. Maximum debt-to-income ratio (DTI) is usually 43%
Your DTI is the percentage of your monthly earnings used to pay off all debt obligations and it’s used by lenders to determine how large of a monthly mortgage payment you can handle. While conforming lenders often work with a ratio of 45% or higher, jumbo lenders typically stick to 43% or less. The explanation is simple: Jumbo loans are ineligible for purchase by Fannie Mae or Freddie Mac and must be sold in the secondary market. This means jumbo lenders take on more risk when they fund a loan—a low DTI gives them confidence that you won’t default.
In addition to healthy income, many jumbo lenders also require significant savings, typically between 6-12 months of reserves depending on your loan amount and credit score. What is a reserve? The equivalent of one mortgage payment, including taxes, insurance and any homeowner association fees. You’re more likely to be approved if you have enough cash in the bank!
2. Higher down payments, monthly payments and credit score
Jumbo loans typically require more stringent credit guidelines, more money down and larger monthly payments than conforming loans. The good thing about hefty mortgage payments? Paying on time will improve your credit score by leaps and bounds!
Lenders can require a higher minimum credit score—typically 700 and above. A credit score of 740 or higher may allow for a down payment option of as little as 5-10%, while a 15-30% down payment option can help you get approved—even if your credit score is in the 680-700 range. This balancing act is the lender’s way of leveraging risk.
3. Lower rates
In the world of jumbo loans, homebuyers often choose an adjustable rate mortgage to secure the lowest possible rate. While jumbo fixed rate loans are available, their rates can be about half-percent higher than those of a conforming loan. When you’re paying off an extra-large loan, the interest rate can really add up. Therefore, considering an ARM may result in a substantially lower monthly payment.
Other jumbo benefits? They don’t typically require mortgage insurance—although the interest rate may be slightly higher as a result. Purchase, refinance and cash-out jumbo loans are available, while acceptable forms of income include self-employed, W2 employee, retirement or asset-based income.
Is a jumbo mortgage right for you?
Can you afford high-value real estate but don’t have enough saved up to bring a loan down to the conforming limit? A jumbo mortgage could be your ticket to a big and beautiful home!
The Guaranteed Rate advantage
Guaranteed Rate has the knowledge and expertise to find you the perfect jumbo loan. Featuring versatile products and flexible lending options, you have the power to purchase more without putting more down. Our jumbo loan program includes:
- Single family home, condo or planned unit development (PUD) options
- 95% loan-to-value ratio (LTV) options up to $850,000
- 90% LTV options up to $1.25M
- In-house delegation up to $3M
- Asset-depletion programs available
- 14+ correspondent jumbo lenders available