Mortgages have made it so easier to buy your desired home, wouldn’t you agree? All you need is to find a lender, and you can start envisioning your life in your new property.
Firstly, it is not easy to find a lender that finances your home purchase at favorable terms. But let’s suppose you find a good enough lender with whom you can negotiate and approve the loan. Now comes the second headache, the loan limit.
There is a certain maximum limit on the amount your lenders can give a loan. In 2023, the amount is $726,200, and it can consistently change. That may put a hold on your dream of buying your dream home, as you may need a higher loan to finance it.
But wait. Before you take that desperate step, you have to mortgage option to save the day. Jumbo mortgage can be the rescuer you were looking for.
What is Jumbo Mortgage?
When you eye a high-value property, you need high financing for it. A jumbo mortgage can be the way to go, as it helps you get a loan that exceeds the conforming loan limit set by the Federal Housing Finance Agency.
A lender offering the jumbo mortgage takes a risk as they breach the limit. That means the loan cannot be sold to Fannie Mae and Freddie Mac, the government-sponsored enterprises. So, the lender can only sell the jumbo mortgage to private investors.
Qualification Criteria of Jumbo Mortgage
Since the loan exceeds the limits and the lender takes a risk offering the jumbo loans, you may see strict eligibility criteria. Here are some of the general requirements by most lenders to have your jumbo mortgage approved.
Credit Score
The ideal FICO credit score when going for a jumbo mortgage is between 700 and 750. That might be enough to appeal to the lender and approve your loan application.
Debt to Income Ratio
The lender needs to trust that you can pay the monthly mortgage as it will not be your everyday little expense. The qualification Debt to Income (DTI) ratio may vary from lender to lender. But having a DTI ratio of 45% should be enough.
Financial Reserves
How much money do you have in the bank? You don’t need to tell us. But that is something your lender might want to know.
Generally, your lender wants to ensure you have enough money to pay a year’s mortgage.
Pros and Cons of a Jumbo Mortgage
By this point, you would have understood how to swim in the water. But do you actually want to dive in the water or not? Meaning is jumbo loan the answer to your financing complications?
You can answer that question by knowing a jumbo mortgage's positives and downsides. And that is what we will discuss.
Advantages of Jumbo Mortgage
Larger Loan Amount
No more missing out on buying your desired properties only because they exceed the conventional loan limit. Jumbo loans help get increased funds for your property.
Unlike conventional loans, you don’t have to take multiple loans just because you can’t have them approved as one loan.
Not Bound by Laws
As the jumbo mortgage does not come under the umbrella of Fannie Mae or Freddie Mac, the lenders have the freedom to make their own decision. This allows them to give leeway to borrowers, such as flexible interest jumbo mortgage rates and personalized terms.
You can use these options to smoothly pay off your loan.
Avoid Mortgage Insurance
Yes, apart from a high jumbo mortgage rate, you may also have to bear a high down payment. But that is something for the future, with the disadvantages. For now, here is the good news.
Since there is a high down payment, you will not have the requirement to buy private mortgage insurance (PMI). This allows you to reduce your monthly expenses and save more money.
Multiple Loan Options
Jumbo mortgage is more than just one kind of loan. There are various loan repayment options you can choose from. Some of these options include:
- Adjustable-rate jumbo mortgage
- Fixed-rate jumbo mortgage
- Interest-only jumbo mortgage
This helps you make your loan repayment easier, according to your preferences.
Fund Multiple Property Types
There are mortgage loans that only allow you necessities like a single-family home. You will not need to worry about that when choosing a Jumbo mortgage.
You can use the Jumbo mortgage to finance various types of properties like vacation homes, multi-family homes, or condos.
Disadvantages of Jumbo Mortgage
Hard Approval Process
Since the lenders take a big risk offering the jumbo loan, they will have their eyes and ears open. You might be required to pay a large down payment and maintain a flawless credit score. In addition, the vetting process can take a longer time compared to other mortgage loans.
Fewer Tax Benefits
Borrowers can enjoy tax deductions on certain amounts. But since the jumbo loan exceeds the loan limits, it may also breach the amount where the homeowner is eligible for the tax deductions.
That means you might not be able to itemize the expense and miss out on tax benefits.
Evidence Needed
Sometimes, even having a good credit history and bearing a high upfront cost might not be good enough for the lender. Before approving the loan, they need to be sure you can repay the loan and won’t default.
That is where you may need to show large sums of money in your financial reserves, your bank account. If you don’t have much money in your bank account, this can make it harder for your loan to be approved.
Lack of Availability
By now, you would have seen the constant theme that jumbo loans are like playing with fire. It is a high-risk, high-reward game that not many lenders are willing to play.
That is why you might have a harder time finding a lender for a jumbo mortgage loan than you will in finding the right property. And even if you find them, it will be a different challenge having the jumbo mortgage approved at favorable terms.
High-Interest Rates
If the borrower defaults on the jumbo loan, it can be a major financial blow for the lender, as reselling the loan will not be easy. They will need to find a private investor for that it does not comply with the regulations of the Federal Housing Finance Agency.
In an attempt to mitigate the damage, the lenders might charge a jumbo mortgage rate throughout the loan repayment period.
Generally, the fixed jumbo mortgage rate for a 30-year loan is 3.32 percent. If you want to decrease the fixed jumbo mortgage rate to 2.5 percent, you may have to go for the shorter, 15-year loan.
Summing It Up
If you think you are financially strong and ready for the high monthly expense, a jumbo mortgage loan has your name written on it.
Now, all you need is to find the property with your name written on it. That is something HARwill solve for you. We are a Texas-based real estate to help you make the right decisions when investing in the right properties.
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