Three Issues to Know About Jumbo Loans
A jumbo loan is a very different ball game than a traditional loan.
If you are buying a home, you will likely need a mortgage. Since this is a huge debt, it is important to understand how these home loans work.
One of the first things that you should know is that mortgage loans can be broadly divided into two categories: conforming loans and jumbo loans. Compliant loans meet the requirements for purchase in the secondary mortgage market through two government sponsored companies – Fannie Mae and Freddie Mac. There are many requirements, but the value of the loan is one of the most important.
If a loan exceeds the corresponding credit limit, it is classified as a “jumbo loan”. The exact definition of this changes from year to year. But as of 2021, loans above $ 548,250 will be considered jumbo loans in most parts of the country.
If you are buying an expensive home and need to take out a jumbo mortgage, there are three things you should know before you begin your mortgage purchase.
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1. Your interest rate will likely be higher
Historically, jumbo loan rates have been higher than conventional mortgage rates.
However, that has not been the case lately. Jumbo loans have been viewed as less risky by investors for years because they have stricter requirements and borrowers tended to be better qualified. As a result, jumbo lending rates were cheaper than traditional lending rates for much of the 2010s.
However, the pandemic changed the mortgage market, causing compliant loan rates to fall. Now, if you need to take out a larger loan and take out a jumbo loan, you can expect a slightly higher interest rate than a well-qualified borrower would pay on a compliant loan.
2. You may need a larger deposit
Because lenders make larger loans and more expensive homes can be sold at market value longer in foreclosure, lenders take greater risk with jumbo mortgages. This is especially true since Jumbo Loans cannot be resold to Fannie Mae and Freddie Mac either. Lenders may need to keep them on their books or try to box them up for sale to other investors.
As a result, many mortgage lenders require a larger down payment on jumbo loans to ensure that borrowers have more money at stake and houses have more equity in the event of foreclosure. While you can find some lenders that allow a 10% down payment, the more likely you will have to put aside at least 20% and possibly even 30% when taking out a jumbo loan.
In contrast, if you are a well-qualified borrower, finding lenders willing to issue compliant loans with 3% down payments (and less) is relatively easy. For more information, see the following guides:
3. Jumbo loans can be more difficult to qualify
Also, because of the added risk of jumbo loans, mortgage lenders want borrowers to have their personal finances in order and very well qualified.
This means that they will require more stringent evidence for:
If you meet these requirements and need to make a larger down payment, you should be able to easily find a lender that offers affordable jumbo loan. Just keep in mind that it will likely come with a slightly higher interest rate than a conforming loan. And finding the perfect lender can be a little trickier, especially if you’re taking out a loan to buy a more expensive home.