Describe a jumbo loan.
A mortgage that is more than $417,000 is referred to as “jumbo” in the majority of the U.S. The barrier is $625,000 in some high-cost areas like New York. This is a loan amount cap rather than a purchase price cap. Therefore, a borrower needs $400,000—not a jumbo loan—to purchase a home for $500,000 with 20% down.
The majority of jumbo loans are given to homeowners moving up to a more expensive home. But lately, more and more first-time home purchasers, particularly those working in high-tech industries, are looking for jumbo loans. It might be challenging for buyers to locate a property priced below the jumbo loan level in particularly pricey housing markets, such as the San Francisco Bay Area.
Jumbo loan specifications
Jumbo loans typically have stricter requirements than conventional loans. In fact, it may be more difficult to qualify for a jumbo loan the larger it is. Most lenders want a credit score of at least 700, a 20 percent down payment, and cash reserves big enough to cover up to a year’s worth of living expenses for loans up to $1.5 million. The lender may ask a 30 percent down payment and 18 months’ worth of cash reserves for loans over $1.5 million. For loans beyond $2.5 million, additional cash up front and in reserve may be needed (up to 45 percent) (up to 36 months).
Additionally, first-time borrowers must have a debt-to-income ratio that is no higher than 42%. (lower for some lenders).
Jumbo loans with low down payments
Some borrowers will discover jumbo loan lenders who demand less than a 20% down payment. The borrower in these circumstances must be exceptionally qualified, with a credit score of 720 or higher, sizeable assets, extremely strong income potential, and a debt-to-income ratio of no more than 38%. However, the loan’s terms might not be ideal. The borrower will be charged a higher interest rate and be required to purchase private mortgage insurance.
In some regions, the FHA guarantees jumbo loans up to $729,750. Borrowers only put down 3.5 percent, but they also pay fees and higher interest rates. Rich purchasers can occasionally borrow up to 100% of the cost of a home by pledging two or more types of security for 20% to 40% of the loan amount. Usually, the bank where the borrower has assets will give these loans.
First-time buyers may have a harder difficulty qualifying for a jumbo loan, but it is still feasible. Particularly if the borrower was previously renting for a somewhat lower monthly sum, lenders want to be sure that the borrower will be able to handle the hefty payments. It can be difficult to adjust to a high-income lifestyle, and not everyone does well.
First-time home buyers or borrowers looking for their first jumbo loan should take the following into account:
Understand your credit score. Verify the accuracy of your credit report card and that your credit score is exceptional to good. Those with the highest FICO scores receive the lowest interest rates.
Increase your cash on hand. The best jumbo loans are for 65% of the value of a home (compared with 80 percent for a traditional loan). To lower the loan-to-value ratio on the primary mortgage, you may need to either put down a down payment of at least 35 percent or apply for a second loan.
Include all expenses. An expensive home can need remodeling, decorating, and furnishing right away. Don’t forget to factor in any HOA dues and additional monthly costs, such as landscaping or a higher utility bill. And make a responsible reserve for ongoing upkeep. The lender will require evidence that you are aware of and capable of covering all of these homeowner fees.
Compare prices. Some lenders are less willing to lend to first-time buyers than others, and some are even more cautious. Again, having a high credit score is important. More lenders will be willing to work with you when your credit improves.
