Perhaps you have heard of jumbo loans. With that, you may have wondered what they are. What are these mortgages all about? Let’s discuss the basics.
True to its name, jumbo loans are mortgages with amounts that are higher than conforming or conventional loans.
If you’re interested in getting a mortgage to purchase luxury properties and expensive housing markets, these are usually the type of mortgage that you should go for.
When a mortgage goes beyond the conforming loan limits, that’s when the loan is considered jumbo. When we say conforming loans, these are mortgages that do not exactly fit the guidelines set by Fannie Mae or Freddie Mac.
Since the FHFA changes conforming loan limits annually, it’s best to keep yourself updated on the matter.
For 2018, the maximum limit set is at $453,100 for one-unit properties. For expensive housing markets, like New York City or Los Angeles, the current maximum limit is at $679,650.
Limits may even be higher in areas beyond the continental U.S., like Guam or Hawaii.
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How do you qualify?
Since these high-cost mortgages are considered riskier than most mortgages, lenders require a more critical approach to their borrowers.
Therefore, homebuyers that need a jumbo mortgage have to make sure that they meet these stringent requirements in order to qualify.
For example, interested borrowers should have a very satisfactory credit score to be considered eligible. Usually, these are scores that range higher than 700.
In contrast, lenders typically require borrowers to have really low debt-to-income ratios. These are usually ratios lower than 43 percent.
Besides all that, you need to have big cash reserves that can cover half to a year’s worth of mortgage payments.
Specific documentation is also required to prove your ability to carry out this type of loan.
Through these documents, lenders will be able to assess your income and assets, both liquid and non liquid, your employment status, and other required information.
What you need to know
These loans started out to have higher interest rates than most conventional mortgages.
However, this has changed in the recent years. In fact, rates for jumbo loans are often close or level with conventional rates.
When it comes to the required down payment, lenders also cut back the needed down payment than their usual.
Before, the mortgage would often require up to 30 percent. Recently, that has dropped to 20 percent or even lower.
While that’s the case, borrowers should keep in mind that having a lower down payment doesn’t necessarily mean it’s a better way to go.
You should remember what the implications are when you decide to pay a lower down payment than the usual.
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The bottom line
In a nutshell, jumbo loans are perfect for high-income families or individuals who wish to purchase expensive properties or homes in high-cost areas.
These mortgages, however, is not for every borrower. After all, you wouldn’t want to buy a home with a mortgage you could not afford to pay back.
Finally, while it’s nice to know that these mortgages have shown more flexibility in qualifying, it’s still important for you to know for yourself it this loan is something you should go for.
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