What Determines a Jumbo Loan?
Understanding the different types of mortgage loans and rates can be a bit frustrating. Have you been calling around to different lenders for rates on jumbo loans and they are not the same fixed rates that you have seen advertised or read in the news. Well there is a big difference between a jumbo loan rate and the more traditional conventional loans that will generate different interest rates and fees.
In my dealings over the past few years I have found that most consumers have misconceptions about what constitutes a jumbo loan. The loan size does play a big part but it is not the only factor. Mortgage loans are divided into two major categories — conforming and non-conforming. While a jumbo loan is always non-conforming, not all non-conforming loans are considered to be jumbo.
Jumbo mortgages provide loan amounts that are much higher than the loan limits typically given in the traditional conforming loan. These limits go above the standard limits set by Fannie Mae and Freddie Mac guidelines. Any loan that exceeds the amounts set by Fannie Mae and Freddie Mac fall under the umbrella of jumbo mortgages.
A loan amount under $417,000 for all states, except Hawaii and Alaska where it is $625K, would be classified as a conforming loan limit. Mortgage loan amounts that are larger than $417,000 are factored into the Jumbo loan category. This larger loan type will have higher interest rates to offset the costs that are incurred by setting the higher loan limits. These rates and cost will vary between lenders, so be mindful of the lenders cost when shopping around.
If there are issues with the borrower’s credit or collateral, the loan will not qualify. Jumbo loans must be for a purchase or non-cash out refinance, unless the refinance is for the borrower’s primary residence.
Super Jumbo Mortgage Loans
Unlike Jumbo loan limits, the super jumbo mortgage category is not specially defined. Instead each individual mortgage lenders will define their own parameters of a qualifying Super Jumbo mortgage. The minimum loan amount for some ranges from $500,000 (with the exception of Alaska, Hawaii, Guam, and the US Virgin Islands where jumbo loan limits on single family residences are $625,000, or 50% higher) to $1,500,000, with maximum super jumbo loan amounts in the range of $10,000,000 and higher
Jumbo Loan for First Time Home Buyer
At first, jumbo loans were normally used by current homeowners that were upgrading to a larger, more expensive home. Lately, however, more and more jumbo loans are being sought by first-time home buyers. But these days more jumbo loan applicants are first-time home buyers. Of course, if you are a first time home and you live in an expensive housing market you will be hard-pressed to find a home for sale at a price below the jumbo threshold loan amount.
Qualifying for a jumbo loan can be harder for first time buyers, but not impossible. Lenders are typically looking for a 700 credit score with a down payment of at least 20% and assets for reserves adequate enough to cover up to 18 months of mortgage payments. Buyers will also need to carry a debt-to-income ratio of no more than 42 percent and maybe lower. If you are a first time buyer, lenders will most likely ask you to meet tighter qualifications. Some lenders will even put restrictions on the loan amount, for example, setting a max loan cap of $1 million. Lenders want to see that the borrower will be able to handle the hefty payments, particularly if he or she was previously renting for a much lower monthly amount, this is call payment shock. Transitioning to a high-income lifestyle can be challenging, and not everyone manages well.
Jumbo loan requirements
Jumbo loan requirements are stricter than the traditional confirming loans. The larger the jumbo loan, the harder it can be to qualify. A credit score of at least 720 is required for loans up to $1.5 million, with a 20 percent down payment and cash reserves sufficient enough to cover up to 12 months of PITI (Principal, Interest, Taxes and Insurance). For loans greater than $1.5 million, the lender may require at least 30 percent down and 18 months of cash reserves. Loans above $2.5 million could require even more cash up front of possibly 45 percent and 36 months of reserves.
Low Down Payment Jumbo Loans
There will be buyers that will locate jumbo loan lenders that will allow less than 20 percent down on their purchase. These borrowers must qualify with a credit score of 720 or higher, significant assets (1 Million or more), and a debt-to-income ratio of no more than 38 percent. Keep in mind, when putting less than 20% down, the lender will require private mortgage insurance, and will charge a higher interest rate. FHA also guarantees jumbo loans of up to $729,750 in some areas and borrowers only pay 3.5 percent down, but again the fees and interest rates will be higher.
The difference between the average rates for jumbo loans and conforming loans are the narrowest that they have been in five years, even with the recent rise in interest rates. In fact, some lenders are offering jumbo rates that are lower than conforming loans. This is great news for buyers looking to purchase luxury homes.
Jumbo loan purchases are still considered to be greater risks than conventional mortgages. As such, some banks will typically price a jumbo loan higher than a conforming mortgage on any given day. A borrower with good credit can typically expect the interest rate to be about 1 percent higher than a conventional. This adds considerable cost to the buyer.
Example: A $417,000 mortgage at 5 percent for 30 years carries a payment of $2,238.55 per month with total interest of $388,874.58 to be paid over the life of the loan. That same mortgage at 6 percent carries a payment of $2,500.13 per month with total interest of $483,042.18 to be paid over the life of the loan — a difference of almost $100,000.
The size of your down payment will also affect your interest rate in a major way. For some lenders, a smaller down payment means a riskier loan, so they tend to charge higher rates. If you decide to put less than 20 percent down, private mortgage insurance (PMI) will be required. This gives the lender some protection in the event of a defaulting on the mortgage loan and it makes the loan less risky. For example, someone putting down 5 percent may pay a higher rate than someone putting down 10 percent while someone putting down 30 percent will likely get a better rate than if you were to put down 20 percent.
Most borrowers realize that their credit score is going to affect the type of interest rate they can get. What few of them know is exactly how much.
Most lenders group credit scores in brackets, with the top brackets getting the best rates. The highest bracket is typically for FICO credit scores of 740 or 760 and above, the second bracket usually begins at 700 or 720, then on down to 680, 660, 640 and 620, the last being about as low as you can go and still obtain a mortgage with most lenders.
Generally, interest rates increase by about 20% each time you go down a bracket. So, if borrowers in the 760+ bracket are paying an average of 3.75 percent for a 30-year loan, those in the next bracket down will likely pay around 3.95 percent, though the steps get bigger toward the lower part of the scale.
Advantages of Jumbo Mortgages
Jumbo mortgages have a relatively negative reputation in the United States. However, despite general impressions of Americans, there are several distinct advantages to obtaining a jumbo mortgage. The most obvious advantage is that the loan limit is set much higher than the limits of more traditional mortgages. This allows borrowers to mortgage more expensive houses that might not be affordable under a lower loan limit. As a result, jumbo mortgages substantially increase the number of options a potential homeowner can choose from.
Another advantage of jumbo loans has to only deal with one lending institution. In a misguided effort at avoiding jumbo mortgages, many homeowners take out multiple mortgages from separate lending institutions. This makes refinancing difficult, and often renders it impossible. Working with a single lending institution allows for easy modifying of loans.
Consider this before starting
- First time Home Buyers – First timers, especially, should check their credit reports and make any necessary corrections. Again, a great credit score is critical. The better your credit, the more lenders will be willing to work with you
- Calculate all costs. Lenders are going to review your DTI (debt-to-income) ratio. Add up all your recurring minimum monthly charges and be ready to prove income in order to show that this mortgage will be affordable for your household.
- Shop around. All lenders have different lending guidelines with Jumbo loan types. Shop around to find the lender that fits best with your needs and is most affordable.
- Factor in all costs. Keep in mind to calculate any HOA fees and other monthly expenses, like landscaping services or a bigger utility bill and set aside a sensible reserve for this regular maintenance.
- Build up your cash reserve. The best jumbo loans are for 65 percent of a home’s value (compared with 80 percent for a traditional loan). That means you’ll need to make a down payment of at least 35 percent, or you may need to seek out a second loan to bring down the loan-to-value ratio on the primary mortgage.
Here at Paramount Residential Mortgage Group we have several different types of Jumbo loan programs for you to choose from. Contact me today for more information on rates and qualifications.