Dreaming big for your first home? Find out about jumbo loans
For generations, first-time homebuyers purchased a modest starter home. Their reasons often were straightforward: They either lacked the money for a bigger home or felt no need for one since they had yet to start a family.
Today, millennials are shocking the housing industry. They are skipping the starter home ; their first home purchase is usually for a much larger, long-lasting home – pretty much a dream home. Why? Millennials are waiting longer than previous generations to buy their first home, for reasons ranging from they are staying single longer to the fact many possess high levels of student debt, so they want to jump right into a house that meets their pent-up desires.
But millennials are also facing a surprise when they buy: the cost of their first home often forces them to procure a jumbo mortgage loan, also known as a non-conforming loan. In a sense, it’s blowing away their preconceptions of what home-buying was going to be.
What is a jumbo loan?
Unlike conventional conforming loans, jumbo loans are not guaranteed by Freddie Mac or Fannie Mae. Those government-sponsored agencies are not allowed to purchase these sizable loans (the name jumbo came from a large elephant promoted by P.T. Barnum -- seriously). Lenders must try to sell them on the secondary market. For borrowers, the credit requirements and debt-to-income ratio are both stricter than a conventional loan, especially because the lender lacks the Fannie or Freddie guarantee protection; in other words, if the loan fails, the lender is on the hook for it. Often, the lender will ask for a higher down payment from the borrower than it would for a conventional loan.
The Federal Housing Finance Agency (FHFA) sets the monetary limits for conforming loans; anything above those limits is a jumbo loan. In 2021, loans above $548,250 are considered jumbo loans in most parts of the United States; in higher-priced areas, such as New York City and San Francisco, a jumbo loan must be taken out for any amount above $822,375. Median home values in a local area are the measuring stick to define the amount where jumbo loans begin.
Why are millennials and jumbo loans great together?
Jumbo loans are popular with younger, high-income earners who hold jobs that promise high paychecks going forward. Because of their age, they have not accumulated a lot of wealth and, in fact, these first-time homebuyers may have significant credit-card debt, which often means they cannot put down a large enough down payment to qualify for a conforming loan.
Interest rates near historic lows have helped prompt millennials’ rush to jumbo loans, along with the rising costs of homes. The FHFA noted that sales prices jumped more than 12 percent in February compared to February 2020. Prompted by people leaving urban areas for the suburbs amid the pandemic, home prices have risen sharply because of tight supply during high demand. As lumber prices soar, millennials wanting to build their first home are finding a much-higher price tag than they expected.
What’s the best way for millennials to be approved for jumbo loans?
Since we know jumbo loans are harder to procure than conforming loans (due primarily to the risk the lender is taking), earning a large salary is a huge factor for millennials with little savings. The longer they can prove they’ve been getting a large salary the better, as the lender may want more than two years’ worth of documentation for jumbo loans for these first-time homebuyers. Their FICO credit scores depend on the amount of the loan and the standards of the lender. For those with low credit scores, the good news is that on-time payments will boost their credit score down the line.
Millennials also need to show a debt-to-income ratio no greater than 43 percent. If credit-card debt is an issue (perhaps too many fancy dinners in the big cities), it may be tougher to get a jumbo mortgage to buy their home, though not impossible.
What kind of properties can millennials buy with a jumbo loan?
Just like with conforming loans, different types of properties can be purchased with a jumbo loan. They are not limited to first homes. Jumbo loans can be used for investment properties, for example, along with second homes and other properties.
Can millennials get jumbo loans from government agencies?
The U.S. Department of Veterans Affairs* offers jumbo loans with no maximum limits and, in certain cases, no down payment. Compared to other high traditional down payments with other loan products, that’s an incredible deal. The VA can also securitize jumbo loans, giving them less risk than other lenders face.
Should millennials wait one more year to apply for a jumbo loan since home prices have jumped?
That’s a tough call. Though home prices may be lower in a year, interest rates may be higher. But with inflation rising, rent prices are likely to jump with it, meaning millennials will be tossing a lot of money down the drain for a year. And buying that first house is a tremendous way to start building equity to help future financial goals.
Should millennials worry about closing costs on their first home?
Since this is their first home purchase, millennials may be stunned by the amount of closing costs, which can be much more expensive than those for a conforming loan. On a million-dollar house, buyers can expect to pay up to $60,000 in closing costs at the time of the transaction. These expenses include appraisals, title insurance and more. But if you’re planning to stay in this home for the long haul (which is likely, since it’s not a starter home), closing costs are worth the price of starting to build equity.
Overall, jumbo loans offer a great opportunity for millennials, or anyone, to buy that first home. Those with high salaries have an advantage over those with lower paychecks for these non-conforming loans, as lenders need to feel secure in their borrowers’ payments, given they are unable to pass the loans on to Freddie Mac or Fannie Mae. As home prices continue to rise, the popularity of jumbo loans among millennials is likely to keep rising with them.
*Guaranteed Rate, Inc. is a private corporation organized under the laws of the State of Delaware. It has no affiliation with the US Department of Housing and Urban Development, the US Department of Veterans Affairs, the US Department of Agriculture, or any other government agency.