Jumbo loans represent a significant opportunity for new homebuyers. These big size loans are not easily available, but if you can prove your financial stability, the bank will most likely approve your application. In cities like San Francisco and New York, it is easy to get a Jumbo loan because of crazy home prices.
For other parts of the country, the median home price remains between $300k-$350k, and that will be considered the loan limit.
Having said that, is it the right option to apply for a jumbo loan? Should you buy an expensive mansion when your income is $100k? What are the benefits and disadvantages of getting a jumbo loan? Let’s read.
Traditionally speaking, it is thought that you have to pay higher interest rates on a jumbo loan. The Govt. won’t sponsor this loan as it is considered a riskier option, but things keep changing. After the housing crisis of 2008, many lenders were hesitant to purchase jumbo loans just like the buyers were afraid to buy new properties. It has been nine years since then, and the market is slowly recovering from the crisis.
Check the interest rates from April 2017.
Interest rates for a conforming loan are 4.250%, and those of a jumbo loan are 4.125%. The interest rates on other products are also lower respectively. Jumbo loans come with strict approval terms and lower interest rates. If you are upgrading to a bigger home or are interested in an expensive home, then jumbo loans may be the perfect opportunity for you.
This one is obvious: To get a higher loan you need a bigger down payment i.e. 20%. That will become $80K for a loan above $400k. Are you willing to pay that much for a jumbo loan? If you have such a big savings account, why limit yourself to a conforming loan? Your best option might be a 15-year conventional loan that can be paid sooner.
However, banks are willing to give loans even with lower down payments. In some cases, you can qualify for a jumbo loan with a down payment of as little as 10%.
Lenders need to know whether you have enough money to cover downpayment, emergency issues, mortgage payments, and other day-to-day expenses. Most banks will require a DTI (Debt-to-Income Ratio) of 35%-38%. That means your total debt payments should not make more than 38% of your total monthly income.
With a salary of $8000/month, your total debt installments including mortgage should be less than $3000.
Credit history also plays an important role. Unlike the conforming loan, you cannot apply with a 580 credit score. Your credit score must be higher than 660, or you will need to submit a higher down payment to reduce the risk factor.
Other than the DTI, the lender would like to see the size of your savings account. It is desired to have 10% + downpayment in your savings account. For instance, when applying for a $650K mortgage, your bank account should have 30% ($195k) of this amount or the equivalent of down payment+mortgage installments worth six months.
Just like the conventional loans, you will need to show proof of consistent income over the last two years. You must show evidence of employment with the same company or show relevant income history if you are self-employed.
Jumbo loans are not harder to get, but when thinking about a big loan, you must ask yourself, is it the right approach? In our market, jumbo loans are not necessary for a regular 1st time-homebuyer. Your best opportunity is to choose a conventional loan, pay it off and then look for bigger opportunities.
Hint: Make sure there are no penalties for paying off your loan earlier. This rule applies to both conventional and non-conforming loans.