Benefits and Drawbacks of a Jumbo Loan
People who are looking at more expensive homes or those in a highly competitive market may wind up considering a loan that is a bit different from a standard mortgage: the jumbo loan. This loan has a few features that set it apart from other mortgage types. These are advantages in some ways and drawbacks in others. By understanding what is involved in this type of loan, buyers can decide whether it is the right vehicle for them or whether they need to adjust their buying strategy.
What Is a Jumbo Loan?
Also called non-conforming mortgages, jumbo loans are loans that are too large to conform to the rules set out by insurers Fannie Mae and Freddie Mac. The limits vary throughout the country. Potential borrowers should look up their county to find out what the limit is and whether home prices in their area would require a jumbo loan. The average throughout the country is $453,100. However, some higher priced markets, such as the West Coast and the Northeast, have limits as high as $679,650.
Jumbo loans are typically used for high price luxury property. However, home prices in some highly competitive areas may also push housing prices up into jumbo loan territory. Like traditional mortgages, jumbo loans are available in a number of options. They can be fixed rate or adjustable rate. In general, jumbo mortgages are available in 30-year loans.
Are Jumbo Loans Harder to Get?
Because they are not eligible for Freddie Mac or Fannie Mae insurance and because they involve larger amounts of money, jumbo loans come with hurdles that other loan types may not. Borrowers may need higher credit scores and down payments. They may also come with higher interest rates.
In general, a credit score of 700 or even 725 is required to qualify for a jumbo loan. A borrower's debt to income ratio should probably be no more than 45% and perhaps as low as 36%. However, borrowers who have significant cash reserves may be exempt from that requirement. As a rule of thumb, lenders want to see enough cash in the bank to cover one year of mortgage payments.
Borrowers will also need more documentation of their income for a jumbo loan. Bank statements will not be enough; typically, they will also have to submit full tax returns and documents like W-2s and 1099s. Additional appraisals of the home may also be required. This allows lenders to be sure that the property that secures the loan has enough value to cover costs if something goes wrong.
Advantages of Jumbo Loans
The main advantage of a jumbo loan is that it allows the borrower to buy a property that they would not be able to if they limited themselves to conforming loans. This can allow people to buy larger homes than they otherwise would or to buy in a highly competitive market.
Drawbacks of Jumbo Loans
Jumbo loans tend to be more expensive at every stage. While conventional loans can often be had with smaller down payments, jumbo loans typically require down payments of 20%. However, in some markets, a down payment as low as 10% may be acceptable.
Jumbo loans typically have higher closing costs and interest rates. The higher interest paired with the high total loan amount can mean tens of thousands more in cost throughout the life of the loan. There are also possible tax implications to a jumbo loan. Most borrowers know that they can deduct the interest on their mortgage on their taxes. However, some people do not realize that there is a cap of $30,000 on this deduction. So, if a borrower pays $60,000 in interest in a single year on a $2 million loan, they can only deduct half of that at tax time.
In the end, it is a good idea for borrowers to consider what they want in a Hesperus new home, what they can afford and what will serve them well in the future. By looking at the long term picture, they can decide what sort of home they can afford, what would make a good investment and what fits their lifestyle best.