Financing your forever home: 3 keys to jumbo loans
Looking to purchase a slice of high-value real estate? Whether you’ve outgrown your starter home or have the means to live large and in charge, a jumbo loan can help you afford a whole lot of house. To determine whether this type of mortgage is right for you, consider a few key facts unique to jumbo loans.
What exactly is a jumbo loan?
Jumbo—or non-conforming—mortgages are needed for loan amounts over the current conforming loan limit of $510,400 in most areas and $765,600 in high-cost areas like New York City, San Francisco and Los Angeles.
In the past, jumbo loans often entailed 20% down payments and higher interest rates. Not anymore. Despite heightening demand in a seller's market, qualifying borrowers are able to receive fixed- or adjustable-rate jumbo financing options starting at 10% down.
What does this mean? If your financial situation is on the upswing, a jumbo loan can help you bypass a starter home and move in to the full-size home of your dreams. Now that you have some background info, let’s move on to a few notable differences between jumbo and conforming loans.
1. Maximum debt-to-income ratio (DTI) is usually 43%
Your DTI is the percentage of your monthly earnings used to pay off all debt obligations and it’s used by lenders to determine how large of a monthly mortgage payment you can handle. While conforming lenders often work with a ratio of 45% or higher, jumbo lenders typically stick to 43% or less. The explanation is simple: Jumbo loans are ineligible for purchase by Fannie Mae or Freddie Mac and must be sold in the secondary market. This means jumbo lenders take on more risk when they fund a loan—a low DTI gives them confidence that you won’t default.
In addition to healthy income, many jumbo lenders also require significant savings, typically between 6-12 months of reserves depending on your loan amount and credit score. What is a reserve? The equivalent of one mortgage payment, including taxes, insurance and any homeowner association fees. You’re more likely to be approved if you have enough cash in the bank!
2. Higher down payments, monthly payments and credit score
Jumbo loans typically require more stringent credit guidelines, more money down and larger monthly payments than conforming loans.
Lenders can require a higher minimum credit score—typically 700 and above. A credit score of 740 or higher may allow for a down payment option of around 10%, while a 15 – 30% down payment option could help you get approved depending on the lender—even if your credit score is in the 680 – 700 range. This balancing act is the lender’s way of leveraging risk. There are additional layers of underwriting requirements for self-employed borrowers that you will want to discuss with your loan officer if that applies to you.
3. Lower rates
In the world of jumbo loans, homebuyers often choose an adjustable rate mortgage (ARM) to secure the lowest possible initial rate. While jumbo fixed rate loans are available, their rates can be about half-percent higher than those of a conforming loan. When you’re paying off an extra-large loan, the interest rate can really add up. Therefore, considering an ARM may result in a substantially lower monthly payment. It is important to know, however, that after a set period of time the rate on an ARM will fluctuate with the market and typically increases.
Other jumbo benefits? They don’t typically require mortgage insurance—although the interest rate may be slightly higher as a result. Purchase, refinance and cash-out jumbo loans are available, while acceptable forms of income include self-employed, W2 employee, retirement or asset-based income.
Is a jumbo mortgage right for you?
Can you afford high-value real estate but don’t have enough saved up to bring a loan down to the conforming limit? A jumbo mortgage could be your ticket to a big and beautiful home!
The Proper Rate Advantage
The market for jumbo loans relies on investors and banks to purchase the loans. However, due to the current economic instability, many are concerned about the continued availability of this financing, but not to worry, Proper Rate is here for you and your jumbo loan needs.
Proper Rate is proud to offer you low down payment options starting at 10%. Plus, we have the knowledge and expertise to find you the perfect jumbo loan. Featuring versatile products and flexible lending options, you have the power to purchase more without putting more down.
Our jumbo loan program includes:
- Competitive fixed rates, ARM and interest only options
- Proprietary jumbo products with in-house underwriting
- Purchase, rate and term or cash-out options
- Loans up to $3M
- Lender-paid mortgage insurance (LPMI) options available
- No cash-out limits
- Flexible condo guidelines
- Piggyback options available
- Non-permanent residents acceptable
- Available nationwide
- 1-4 units, condos, PUDs, co-ops and condo-tels
- Primary residence, second homes and investment properties
- Non-warrantable condo options
- Gift funds allowed
Plus, low down payment options are available on our jumbo home loan products:
- As low as 5% down payment options on loans up to $650k*
- As low as 10% down payment options on loans up to $1.25M
- Asset depletion programs available
*Applies only to loan programs for medical doctors. Contact your Proper Rate loan officer for more information about this financing option. Restrictions apply.
Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply, contact Proper Rate for current rates and for more information.