Tips on how to Use a Jumbo Mortgage to Purchase a Mansion – Robb Report
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When it comes to buying luxury homes, cash may no longer be king. If you drop cash on a multimillion dollar house, you need to tie up your cash. And with mortgage rates at historic lows, that money is probably best placed elsewhere, so financing might be the smarter option.
Buying a villa with a jumbo mortgage is a little different than financing property at a modest price with a traditional fixed rate loan. A jumbo mortgage has its own special rules that we teach you to secure the purchase of this villa.
What is a Jumbo Mortgage?
Most traditional mortgage loans are called “Compliant Loans” because they meet the Federal Housing Finance Agency (FHFA) lending standards, which oversee Fannie Mae and Freddie Mac loans. With compliant loans, lenders are protected from loss in the event of a borrower default.
The FHFA sets the maximum amount of compliant loans for single family homes each year. In 2021, that cap is $ 548,250 for most of the country. However, in certain areas with higher cost of living (such as parts of California, Hawaii, and Washington, DC), compliant mortgage limits can be 150 percent higher (up to a maximum of $ 822,375).
Mortgages that exceed these limits are known as “non-compliant conventional mortgages,” commonly referred to as jumbo loans. These loans are not guaranteed by the government and are therefore riskier for lenders depending on the creditworthiness of the borrower. Therefore, the underwriting standards are stricter than traditional loans.
Related: Check out jumbo mortgage rates in minutes with Better
Jumbo Mortgage Requirements
Because jumbo mortgages do not fall under the purview of the FHFA, lenders can set their own criteria for approval. That often means that these loans are harder to come by.
First, you need good credit to qualify for a jumbo mortgage. Lenders typically require a minimum score of 700 to borrow up to $ 1 million. For even larger loans, you might need a score in the 720 to 760 range.
To make sure your credit history is in order, you can get a copy of your credit reports from any of the three major offices (Experian, Equifax and TransUnion) through AnnualCreditReport.com. Make sure to check your reports for any bugs or negative points that need to be fixed before applying for a loan.
Lenders will also check your debt-to-income ratio (DTI). This is a measure of how much of your gross monthly income is used to pay off debt, expressed as a percentage. For example, if your income is $ 15,000 per month and you have credit card, student loan, and car payments totaling $ 4,500 per month, your DTI is 30 percent.
Most mortgage lenders require that your DTI ratio be less than 43 percent when calculating all of your debts with your monthly income, including your mortgage payment.
Interest rates are exceptionally low right now, and jumbo loans are no exception. While the increased risk of a jumbo mortgage meant higher interest rates in the past, it is not today. The average 30-year jumbo mortgage rate at the beginning of July was just over 3 percent, or about the cost of a corresponding loan.
The adjustable interest rates for jumbo mortgages are slightly higher. For example, the average annual rate (APR) on a 5/1 adjustable rate mortgage (ARM) – that is, the rate is fixed for the first five years and then becomes an floating rate for the remainder of the loan term – ran over 3, 7 percent in June. Closing costs can also be more expensive, as taking out a jumbo loan comes with a higher administrative burden.
Lenders usually require a substantial down payment of 20 percent or more for a jumbo mortgage. That means you have to come up with $ 200,000 in cash as a down payment on a $ 1 million home. Some lenders may only accept 10 percent less depending on the situation.
Jumbo Loan Alternatives
It is entirely possible to finance a villa with a jumbo loan. The real question is, should you?
When weighing the pros and cons of a jumbo loan, keep an eye on cash flow. A $ 1 million mortgage with a term of 15 years and a 3 percent interest rate would mean you’re hooked for more than $ 5,700 a month. If your income is unpredictable and you don’t have a ton of cash on hand, you might find yourself messing up your finances to make the payments.
Perhaps you choose a different financing option. For example, depending on the price of the property, you could use a piggyback loan instead. So instead of one jumbo loan, you can take out two smaller mortgages.
A common piggyback loan structure is 80/10/10. This means that you take out a mortgage for 80 percent of the amount to be financed, then take out a further 10 percent via a second loan and make a down payment for the remaining 10 percent. This will also help you avoid paying for private mortgage insurance that lenders may need to cover against your credit default.
Remember, you need to keep adding payments to your monthly cash flow and keep track of two loans instead of one.
Another option is to pay a much larger deposit, e.g. B. 50 percent or more. This can help you borrow less and meet appropriate credit limits, resulting in lower interest and fees, as well as lower monthly payments. Again, you need to decide whether to better use your cash on a down payment, use it to pay off high-yield debt, or invest it while you save more.
When buying luxury real estate, you have many options. The key is figuring out the numbers by figuring out how to best use your money and how to use low-interest debt to your advantage.
Casey Bond is a veteran personal finance writer and editor. Her work has been published not only on Forbes, but also on HuffPost, Business Insider, Yahoo! Finance, MSN, The Motley Fool, US News & World Report, TheStreet and more. Follow her on Twitter @CaseyLynnBond.