What to Know About Getting a Jumbo Loan
If you're thinking about purchasing an expensive house sometime in the coming months, you've probably heard some lenders and real estate agents use the term "jumbo loan." A jumbo loan is a loan that goes above the conforming loan limit. Typically, jumbo loans are necessary for purchasing a luxury property. In areas with a high cost of living, jumbo loans may be required to purchase smaller, non-luxury properties.
Before you buy a home with a jumbo loan, you should know what this means, what the conforming limit is, and whether you're ready to make the high payments that could come with this type of loan. Working with a real estate professional and a good lender can help. Here's what you need to know.
All About Conforming Loans Vs. Jumbo Loans
Every year, the Federal Housing Finance Agency (FHFA) announces the maximum limit for a conventional mortgage, known as a conforming loan. Limits change annually to reflect the value of standard homes, the state of the economy and the value of the dollar. Limits can vary based on location, since home prices and cost of living prices vary from one area of the country to another.
What Should You Know about Conforming Loans?
Loans backed by the government, like FHA loans and USDA loans, are all conforming. Standard mortgages are also conforming. Conforming loans tend to have most of the same characteristics and qualifications, although there may be some variation from one loan type to another.
For example, most conforming loans require the borrower to pay mortgage insurance. Mortgage insurance is a type of insurance that pays the balance due to the lender if the borrower defaults. Mortgage insurance premiums are paid by the borrower.
Many conforming loans also enable the borrower to get a mortgage after making little or no down payment. USDA loans, for example, require no down payment. FHA loans require a down payment of 3.5%.
Finally, conforming loans have flexible credit requirements. Many people who have relatively low credit scores can get a conforming loan, if they can make the down payment and find a suitable lender. All in all, conforming loans are an excellent tool for people seeking an affordable home.
How Are Jumbo Loans Different?
Jumbo loans have more risk. The bigger the loan, the more money the lender stands to lose if the buyer defaults. Non-conforming loans have stricter requirements to protect the lender and justify the risk. For example:
- Higher down payment requirements. Most jumbo loans require the buyer to make a down payment of least 20%.
- Stricter credit requirements. To qualify for a jumbo loan, most home buyers must have a credit score of at least 700 points.
- Higher interest rates. Sometimes the interest rates on jumbo loans are higher than the interest rates on standard loans.
Some jumbo loans may require the buyer to pay mortgage insurance. This varies by lender.
Benefits of Jumbo Loans
For a home buyer who is seeking a large property, a high-end home, or a home in a high cost of living area, a jumbo loan may be what the buyer needs in order to secure the property they want. Jumbo loans can be an excellent product for a buyer with adequate resources and a secure, well-paying job.
Risks of Jumbo Loans
When home values go down for any reason, the value of high-cost homes often go down more than low-cost homes. If the cost of the home drops below the loan value, the homeowner will be considered underwater on their loan. This makes it very difficult for the homeowner to walk away from the property without taking a financial hit. Refinancing a large loan can also be a challenge. Overall, people who take out jumbo loans are sometimes at higher risk for defaulting on their mortgage.
Need a Jumbo Loan? What to Do
Qualifying for a jumbo loan is not much more complicated than qualifying for a conforming loan, if the borrower has the right financial resources. These tips can help:
- Get pre-approved
- Save an ample down payment
- Shop around for the best rates
Sometimes shopping around is also necessary because not all lenders offer jumbo loans. Qualifying for a loan of any kind can be a time-consuming job. Lenders require a lot of paperwork from borrowers in order to approve a loan of any kind. Getting started early can ensure that the borrower will find the right lender and the right loan for their budget.
Contact a Lender
Are you in the market for a Redondo Beach CA luxury home, or buying a modest home in an expensive area? You may need a jumbo loan. To find out more about qualifying for a jumbo loan, contact one (or several) lenders in your area.
If you're ready to begin your home search, contact a reputable real estate professional. A good real estate agent can help you find a home that fits in your budget and meets your needs.