Securing a mortgage is more achievable than you may realize. This handy guide aims to shed light on the concept of a loan. Whether it aligns with your financial situation.
What Is a Jumbo Loan?
A jumbo mortgage, also referred to as a conforming mortgage is a loan provided by a lender that does not adhere to the standards set by Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac established by Congress in 1938 and 1970 respectively play roles in ensuring stability and affordability, in the mortgage market by purchasing ‘conforming’ mortgages from lenders. This process enables lenders to maintain liquidity for issuing mortgages.
As of 2024 the national conforming loan size limit for a single unit property stands at $766,550. Can vary higher in high priced regions. For details visit the FHFA website.
Loans exceeding these limits are commonly known as mortgages or non conforming mortgages.
When Is It Suitable to Opt, for a Jumbo Mortgage?
When you’re looking to borrow an amount that exceeds the loan limit in your area you’d opt for a mortgage. In parts of the country this means going for a mortgage if your loan amount surpasses $766,550.
In high cost areas the conforming loan limits exceed $766,550. To find out the limits, in your area you’ll need to check the FHFA website.
Some lenders consider any loan exceeding $766,550 as a loan in high cost regions where the conforming limit can reach up to $1,149,825.
However don’t assume this rule applies if you’re in an area with a conforming limit than $766,550. It’s best to inquire with your lender about what type of loan you qualify for.
Is Qualifying for a Jumbo Mortgage Different?
The qualifying process for mortgages follows the general approach as conforming loans. Lenders will assess factors like credit score, down payment amount, debt, to income ratio ( debt compared to income) and available funds after closing costs are covered.
Credit score requirements are pretty similar, for conforming and jumbo loans; typically a credit score of 680 opens up most loan options though you might face slightly higher interest rates compared to someone with a top notch credit score of 780 or above.
When it comes to the money you have left after closing on a loan often referred to as reserves or post closing liquidity jumbo loans tend to be more strict than conforming loans. Jumbo lenders usually prefer to see 12 months worth of reserves after closing with half in assets (like a checking or savings account). The other half calculated from retirement funds. On the hand conforming loan reserve requirements can vary from 0 to 12 months depending on factors such as your credit score, down payment amount and debt to income ratio. Some exceptions may apply for loans if your debt to income ratio is low. You’re making a sizable down payment.
However jumbo loan approvals offer some flexibility that conforming loans don’t;
They may allow for debt to income ratios. While conforming loans, with a payment of 20 percent or more typically require that your total monthly housing costs plus other bills don’t exceed 43 percent of your income, non conforming jumbo loans could offer some leeway in this aspect.
For instance if you have significant cash reserves remaining loan closure you may qualify for a jumbo loan, with a debt to income ratio exceeding 43 percent. When it comes to income assessments jumbo loans often follow criteria compared to conforming loans. For instance if you’ve worked in the industry for 15 years and recently launched your business within that sector a conforming loan would typically necessitate two years of filed self employed tax returns. However a jumbo loan might require one year of filed returns if you can demonstrate that your business is stable or growing.
Moreover jumbo loans can allow down payments of than 20 percent without the need for mortgage insurance. In some cases down payments on loans can be low as 10 percent for loan amounts of $1 million or higher – translating to a purchase price of $1.1 million or more. Unlike conforming loans these down payment jumbo programs usually do not mandate mortgage insurance. However in exchange for this flexibility most lenders may offer rates (around 0.25 percent) and require debt to income ratios between 30 to 36 percent for these low, down payment jumbos.
How Do Jumbo Loan Rates Compare to Conforming Loan Rates?
Before the downturn of 2008 jumbo loans typically carried interest rates that were least 0.25 percent higher, than conforming loans. This was due to the perception that jumbo lenders were taking on risk by providing loans that couldn’t be sold to government backed entities like Fannie Mae and Freddie Mac. As a result consumers had to bear interest rates.
In the years following the crisis federal regulations have influenced rate markets in a way that has allowed banks to maintain loan rates at similar levels to conforming loan rates.
This situation is subject to change, over time so its advisable to consult with your lender for a comparison of options.
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