Everything You Need To Know About Jumbo Loans

Most financial tools aren’t as aptly named as jumbo loans. This is one loan where industry jargon doesn’t get in the way. As the name suggests, jumbo loans are big. But the size of the loan isn’t the only factor that sets jumbo loans apart from other lending options.

Here’s a quick look at everything you need to know about jumbo loans.

What Are the Advantages of a Jumbo loan?

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Most people never realize there are limits for traditional loans because they don’t need to spend over half a million on a home. If you live in an area where average prices are well above the national median (we’re looking at you California) then a jumbo loan may be necessary to become a homeowner since other loans aren’t an option.

Jumbo loans are fairly flexible in terms of what property you can buy. Primary residences, second homes and investment properties can all be purchased with a jumbo loan.

Another advantage of a jumbo loan is no private mortgage insurance (PMI). Even if the debt-to-value is below 80% PMI usually doesn’t apply.

What Are the Disadvantages of a Jumbo Loan?

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A jumbo loan is a non-conforming loan since it exceeds the Fannie Mae and Freddie Mac loan limits (2018 national average for a one-unit is $453,100). That means a jumbo loan isn’t guaranteed by Fannie Mae or Freddie Mac, which makes it a riskier venture for the lender. If there’s one constant in home mortgages it’s high risk equals higher cost.

Most jumbo loans have a slightly higher interest rate compared to conforming loans. However, if the borrower has great credit, income and other assets the interest rates are relatively competitive.

You’ll also need more money upfront. While the down payment requirement has eased up on conforming loans, you’ll still need at least 10% down for a jumbo loan. Other closing costs will also be higher. This is because the lender has to dig deep into a borrower’s financial history and process more paperwork.

Another thing to be aware of is that lenders create their own underwriting guidelines on jumbo loans. That means the requirements can vary significantly from one lender to the next. But there’s one requirement that’s fairly standard - a high credit score. You’ll need to have a credit score of at least 680-700 to qualify.

Why You Might Want to Consider a Jumbo Loan

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As noted above, jumbo loans are used by buyers with a budget that’s well over the average home price. If you live in an area with high property values or you’re in the market for a luxury home you’ll probably need a jumbo loan.

Questions to Ask Before Getting a Jumbo Loan

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  • Is the purchase price of the home over the conforming income limits for the county?
  • Are home prices stable or expected to appreciate?
  • How did the area fair after the last housing downturn?
  • What are the underwriting requirements?
  • What are my other purchase options?
  • Do I have enough cash on hand for the down payment and closing costs?

The larger the loan is the more careful a borrower needs to be. If you can’t find answers to the questions above talk with a local lending expert.

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