What Is A Jumbo Loan And How Do They Work

lock and loans
FHA Loan vs. Conventional Loan: A Detailed Comparison
December 2, 2020
Show all

What Is A Jumbo Loan And How Do They Work

shaking hands

Whenever people shop for a home, checking out the kind of mortgage that’s best for them is among its most vital components. However, what would happen if you need to get a mortgage that has a high value? In case you want to buy your dream home, check out our guide so you can decide if getting a jumbo loan is best for you.


What Is A Jumbo Loan?

Also known as a jumbo mortgage, the jumbo loan is a mortgage loan with a limit that exceeds what the FHFA or Federal Housing Finance Agency set. This kind of loan can be riskier for any lender as those sponsored by the government can’t acquire it.


What Are The Conforming Limits of a Jumbo Loan?

There are limits on how high you can get a mortgage that people refer to as conforming loan limits. These are mortgages that are under the limit with insurance for the protection of the lender. People sometimes refer to jumbo loans as “non-conforming loans” as they often go beyond this limit.


The limits of a conforming loan may be different depending on the market and the state. For the current year, it can only be possible for you to borrow a maximum of $510,400 for a one-family unit in most of the U.S. Yet, it can still be possible to have conforming loan limits up to $765,600 in Hawaii and Alaska. These can only apply to single-families units as multi-family units have higher limits that may be different for every state. Whenever your loan’s money becomes more than your limit, your loan will automatically turn into a jumbo loan.


Mortgage Rates of a Jumbo Loan

Because of the higher risks, lenders often charge higher interest rates on jumbo loans. Yet, according to market information nowadays, jumbo loans now have highly competitive interest market rates. Nowadays, the rates vary from 0.25% to 1% between non-conforming and conforming loans. In reality, there are even jumbo loans that have lower rates compared to mortgage loans.


Ways A Jumbo Loan Works

Like any conventional mortgage, people can get carious repayment schedules and terms for jumbo loans with an adjustable or fixed rate. Yet, jumbo loans don’t work the same as any conventional mortgage as they often have stricter requirements compared to other kinds of mortgages. Besides that, you may need to meet requirements on debt-to-income ratio, credit score, down payment, and specific types of properties before you can get one.


Down Payment

Usually, jumbo loans require a down payment that is so much higher than any conventional loan. Frequently, lenders set a 20% down payment for single-family unit jumbo loans. It may also be possible for them to ask for a more significant down payment for multi-family residences and second homes. When it comes to the VA jumbo loan, you can have a loan even if you don’t provide a down payment. However, it would help if you had a median FICO® Score that is 740 or more. In case your median score is 680 or better, the down payment may be at 5%.


Lastly, having a 640 or higher median credit score would require you to provide a 10% down payment. The policies may differ between lenders when it comes to the down payments for VA jumbo loans. The rules in down payment may work in different ways whenever there is an impact on your title, as this means that you only have partial entitlement remaining.


Credit Score

The primary factor in getting a jumbo mortgage is the credit score. This numerical rating tells of your reliability as a borrower. Have your score evaluate by using several factors that may range from 300 to 850.


Frequently, you need a minimum credit score of 700 if you want to have a 1 to 2-unit loan limit that is up to $1 million. If your loan is from $1 to $1.5 million, the credit score must be 720. Whenever the value is at $1.5 to $2 million, you should have a credit score of 740. If you want to purchase a second home, your credit score must be around 720 to 740, which could depend on the amount you wish to loan.


Type of Property

You may use the jumbo loan to buy different properties as long as you meet all of the lender’s requirements. When it comes to the jumbo loan, there are no government restrictions. You can still use them on most of the jumbo mortgages for investment properties, vacation houses, and primary residence. Whenever you want to have the VA jumbo loan, you need to meet the VA property standards and have your home as the primary residence. It may not be possible to purchase an investment property with a VA jumbo loan.

Moreover, your home should also meet the VA appraisal standards, and it has to be safe, sound, sanitary, and clean before you move in. Whenever you get the loan, the VA appraiser will check out the property to ensure that it qualifies every requirement.


DTI: Debt-To-Income Ratio

Comparing how much money you earn against the debt you have is called the DTI or debt-to-income ratio. Know your DTI ratio by dividing every needed minimum payment monthly by the amount that you are earning before taxes. Whenever you pay around $1,000 monthly in bills and earn $2,000 a month (without taxes), divide $1,000 by $2,000, your DTI ratio is at 50%.

It is vital to get a low DTI ratio whenever you get a jumbo loan, as this can tell lenders that you have sufficient cash flow that can cover your payments in the mortgage. Get approval to purchase a home. Cornerstone Capital® will allow you to go house hunting faster.


Apply NOW


money loan

Unique Things to Consider For Jumbo Mortgages

Before applying for a jumbo loan, make sure to consider the following:


Lenders May Need to Verify Your Cash Reserves

Lenders need to become aware if you are capable of paying regularly and consistently on a jumbo loan. Your lender would check your bank statements as this is proof that you have sufficient money in the bank to keep up with the payments. Lenders often require jumbo borrowers to reserve a maximum of 18 months of expenses before getting a loan. In case you have a business, they may require an additional amount of reserves that you can use for six months.


To meet your reserve requirements, the money that you have in your bank account may not be the only way to attain this. It can be possible for the lenders to consider 70% of your retirement funds to cash out all your funds if you want to meet this rule. There are even times when gifts and business funds can accommodate reserve requirements.


Manual Underwriting

Since jumbo loans get manually underwritten, finance experts will have to check your bank statements, assets, and credit reports very well so they can be aware of any missteps. In case your account has a foreclosure or bankruptcy, it may become difficult for you to get a jumbo loan.


Consistency of Income

Lenders offer jumbo loans to buyers with regular and predictable income. They ask for 2-year 1099s, tax documents, and W-2s whenever you want to have a conventional loan. In case you want a jumbo loan, the lender may require additional proof and documentation that there will be no changes in your income once you get the loan.


Higher Closing Costs

The range of closing costs is often from 3% to 6% of your home’s total value. However, jumbo loans can have higher closing costs compared to the conventional mortgage. If you have a mortgage of $500,000, expect to pay around $10,000 – $25,000 in cash whenever you are at the closing table.


VA Funding Fee

As per the VA rules, you may not be able to finance funding fees if your loan is more significant than $510,400. Similar to the rule 25% downpayment, you need to pay the prorated VA funding fee in cash whenever it closes on an amount that is more than $510,400. You may also inquire from the seller to have this portion cover your cash closing costs.


Summary

Large home loans with conforming limits that are high are called jumbo loans. These are mortgages that are riskier compared to government-backed or conventional mortgages because of the lack of insurance. Because of this, whenever you default on the jumbo loan, the bank will become responsible for the bill. Whenever you want to purchase different properties using the standard jumbo loan, the requirements may vary for every lender.


Jumbo loans have down payment requirements that are often higher compared to conventional mortgages. You need to give a down payment of 25% the amount over your local conforming limit for VA jumbo loans. There are even higher standards in the cash reserves, DTI ratios, and credit scores that lenders require for jumbo loan applications. Before getting a jumbo loan, you need to consider every requirement and go through every option in detail.


Get Your Dream Home with Cornerstone Capital

At Cornerstone Capital, we make the process of getting a dream home for every home buyer completely hassle-free. From connecting buyers to the most reasonable mortgage broker to easy loan application to providing the final possession of your own house, we are at your service. Cornerstone Capital does not just provide attractive mortgage rates for you to buy a house; we also offer the comfort and pleasure of having your place. We optimize the process of choosing a suitable mortgage plan, applying for a loan, paying the down payment, and turn your dream home into real-life brick and stone.


Having your own house is a milestone in the journey of any individual. Being the leading mortgage broker in Essex County, we take the responsibility of letting you have your home on our shoulders and help you achieve this milestone. We advise and guide you to make nothing less than the best decisions for yourself. As lenders, for Cornerstone Capital, clients are not just borrowers; they are our companions in the long run. We aim to cater to every individual borrower’s unique needs and demands and accordingly provide a credit plan.


Contact us and connect with the best mortgage broker in Essex County, so your dream will become a reality.