Understanding How Jumbo loans Work
A jumbo mortgage is any mortgage that exceeds the conforming loan limit of $424,100 for a single-family home in most areas of the United States. In certain high-priced areas, the loan limit is $636,150.
For instance, in Los Angeles, the limit is $636,150, and in Honolulu, the limit is $721,050. Mortgages that exceed these amounts are jumbo loans, also known as non-conforming loans.
Because private lenders will be lending their own money, the qualifications for jumbo loans are more strict than any other type of loan.
VA jumbo loans are also available for Veterans looking to purchase a home valued above $424,100. VA jumbo mortgages will require a downpayment of 10% or more.
Conforming loan limits for the majority of U.S. counties (Updated for 2017)
- $424,100 for one-unit properties
- $543,000 for a two-unit property
- $656,350 for a three-unit property
- $815,650 for a four-unit property
Conforming loan limits for high cost areas (San Francisco, Los Angeles, New York, Hawaii, Virgin Islands, and Guam)
- $636,150 for a one-unit property
- $814,500 for two-units $984,525 for three-units
- $1,223,475 for four-units
Each bank has its own requirements for those applying for non-conventional mortgages. Typically, lenders will want to see a minimum credit score of 700. Essentially, you’ll have to be able to prove that you can manage the high monthly payments. You’ll have to show:
- Stable employment of at least 2 years with current employer
- Last two years’ worth of tax returns
- Proof of current income with bank statements and pay stubs
- Liquid funds to use as a down payment
- 700+ credit score
- 15%-20% down payment
- Loan amount needed is between $424,101 – $3,000,000
Down payment required for a jumbo mortgage
The majority of lenders will require a 20% down payment in order to qualify for a jumbo mortgage loan. When you put 20% down you will not be required to pay mortgage insurance, which is a huge advantage of a higher down payment.
There are some lenders that offer a jumbo mortgage with a down payment of just 15 percent.
This is advantageous because you can put just 15% downing still avoid paying PMI on the mortgage.
You will need to speak to lenders to see if they offer this option.
80/10/10 Piggyback mortgage loan
Some lenders will even offer what’s called an 80-10-10 piggyback loan. Where you borrow 80% of the purchase price, plus get a second loan for 10% of the purchase price.
This allows you to put just 10% down and avoid PMI.
Super Jumbo Mortgage Loan
A super jumbo loan will vary from lender to lender. Most lenders consider any mortgage loan amount over $650,000. However, the way a super jumbo mortgage works is the exact same as a jumbo mortgage loan.
Disadvantages of Jumbo Loans
Being able to borrow a large sum of money is the main advantage of a jumbo mortgage loan. Without jumbo loans, buyers would have to come up with a large sum of cash to be able to purchase expensive home. There are some drawbacks to consider.
- High credit score requirements ( Typically 700 is the minimum credit score)
- Higher interest rates
- High down payment requirement (Usually 10%-20% or more)
- Difficult to get approved for
- High monthly payments
Do you need a Conforming or Non-Conforming Loan
It’s important to note that a high-priced home doesn’t necessarily require the owners to take out a jumbo mortgage. It’s all about the amount of money you’re borrowing, not how much the home costs.
For instance, if you’re looking at a $500,000 home, but you have 20% for a down payment, you only need to borrow $420,000. This is within the limits for conventional mortgages.
Those who are on the cusp of qualifying for conventional mortgages often find that it can be better to wait for a larger down payment.
Someone looking at homes in the $500,000 range with only $50,000 for a down payment, for example, would typically need a non-conventional mortgage.
By saving up an additional $25,000 toward the down payment, they’d qualify for a conventional mortgage at a lower interest rate. This results in lower monthly payments and bigger overall savings.
Can You Afford the Loan?
The other piece of the puzzle is whether or not you can actually afford the payments. If you were to get a $500,000 mortgage at a 5 percent interest rate, you’d pay almost $2,700 per month.
That figure does not include homeowners’ insurance or property taxes, which can easily increase the monthly payment by $1,000 or more. In comparison, a $400,000 conventional mortgage at a lower interest rate of 4 percent would result in monthly mortgage payments of $1,900.
When lenders look at your finances, they’re only looking at certain types of expenses – student loans, car payments, and the minimum payment on credit cards.
Their analysis does not include groceries and utilities, kids’ private school tuition or paying more than the minimum amount on the credit card to pay off your debt.
You have to decide how much your family really can afford before making a final decision.
Jumbo mortgage loans are available, and they’re not difficult to get if you meet the lender’s requirements. However, it’s always smart to shop around for the best deal.