When it comes to financing, companies, as well as individuals look for various sources to maintain their requirements and exigencies. The organized and unorganized sector provides multiple types of mortgages based on gold, shareholding, property paper, credit history, earning capability, repayment feasibility, and many more. Out of all these options, the Jumbo loan is one of them.
It is quite famous among people in most of the states of the United States and people avail themselves it for various purposes. No or little information about the loan is hampering the growth as well as make the people vulnerable to fraud and high-interest rates. If you are looking for an article that deals with every aspect of the jumbo loan, you are landed on the right page.
What Is Jumbo Loan?
Jumbo means a very large person and things as per dictionary and when it comes to Jumbo loan, the same things apply. This is a category of loan or mortgage that is beyond the limit prescribed by the Federal Housing Finance Agency (FHFA). It is specially designed for people looking for luxury properties and homes in the most competitive market in the USA. Unlike the normal mortgages, here the rules of repurchase, guarantee, and scrutiny by Fannie Mae or Freddie Mac do not apply.
Fannie Mae or Freddie Mac is a home mortgage company backed by the federal USA government. As their role in the jumbo loan is limited, people can get the loan way beyond their limit.
There is a great amount of traction among the public post the great recession that happened during 2007 and 2009. Between that period and in later years, property faced major drawbacks.
During and after the recession, companies were reluctant to give the mortgage of any type and property mortgage in general. In the last some years, there is a good recovery in the real estate sector and slowly the sector is recovering. Jumbo loan plays a vital role in shaping the good fortune of the real estate sector.
A jumbo loan does not fall under the complicated underwriting and tax implications of federal and states governments. It has different and easy tax compliance features that make it one of the best sought-after loan categories in the USA. It does not mean getting this loan is simpler than the other types of conventional loans.
People looking for a Jumbo loan undergoes the hard credit requirements as financial institutions take a greater risk in gives long beyond the prescribed limit of the Federal housing finance agency.
Federal housing finance agency or FHFA sets the loan limits for the areas outside the continental United States. The agency sets the limit loan limit for different states and even for the county.
It sets the limit by considering all the factors on an annual basis, however, the agency is empowered to increase and decrease the limit frequently.
Example Of Jumbo Loan
Let’s say, you have planned to buy a luxury property at the prime locations in Los Angeles. The agency prescribed the limit for a mortgage loan for Los Angeles, but the property price is much higher than the limit.
So let’s say, the limit is 700$ and you are looking for 701$, this will be considered as a jumbo loan. It means, even 1$ beyond the prescribed limit can be regarded as a jumbo loan.
The federal agencies have set the limit as $548,250 for a single-family home in all states for loan processing. This limit is except for Hawaii and Alaska where the limit is $822,375. So any house purchase through finance beyond the prescribed limit is considered a Jumbo loan.
In the USA, you can also get high-balance loans that are different from a jumbo loan.
Considering the same example, you can purchase a high-cost property through high-balance loans. But, here you need to note that these types of loans are only available in the counties that are designated as high cost by the FHFA.
The Minimum And Maximum Limit For The Jumbo Loan
FHFA has approved $548,250 as the maximum prescribed limit for home mortgages, so this is the minimum limit for a jumbo loan. The maximum limit is at par with the national high-cost limit that is $822,375 in 2021. It means you cannot get the loans above the national high-cost limit in the USA.
The limit is indicative as the agency keeps changing it considering various facts and figures. The minimum limit is set for all, but the maximum limit depends on various factors.
Not everyone can ask for the maximum limit unless that person has a good credit score, heavy cash balance, earning ability, debt to cash ratio, and others.
Working Process Of Jumbo Loans
As you have understood that jumbo loan is anything that is beyond the prescribed limit set by the agency, here the process is also different from normal loan processing.
The simple rule of lending applies here that states that the higher the amount, the higher the risk. The federal agency set the limit and if financial institutions have to go beyond that for serving the customer, the applications must be well scrutinized.
Lenders ask for your credit score, financial responsibility, earning capability, and all the other information that determines your eligibility. You require to have a high credit score probably at least 700 for approval. A higher credit score also helps you in getting the jumbo loan at a lower price.
If you have decided to purchase a high-cost property but your bank balances do not support that, it’s time to look for a jumbo loan. This loan category carries major credit risks as there is no guarantee by the Fannie Mae or Freddie Mac.
Before the recession (2007 & 2008), the jumbo loan was not that stringent but since then, it has become hard to get.
Besides a high credit score, an applicant also requires low debt to income ratio.
It means if you already hold a loan that is taking a high percentage of your earning, probably you are not eligible for the jumbo loan. The ideal debt to income ratio should be lying between 36 % to 43 %.
It is important to note that a jumbo loan is not guaranteed by FHFA, still rules of the consumer financial protection bureau apply here. There are standardized terms and rules for the Jumbo loan.
After meeting the basic requirements, you get in touch with the financial institutions providing the jumbo loan. You may be asked to prove that you have accessible cash in hand to pay some down payments and initial premiums.
The exact cash on hand depends on various factors but most of the borrower asks for 30 days of pay stubs along with W2 tax forms stretching back two years.
A jumbo loan is easier for professionals having a constant source of income as compared to the self-employed person. For those who are self-employed, the income requirements are much higher. You need to submit two years of tax returns and minimum 60 days bank statement proving your eligibility for the loan.
Lenders also ask you to submit the proper documents of every important aspect to sanction the loan. You need to submit all the other loan-related documents too with the lenders.
If you submit wrong information or documents, your application will be thoroughly rejected and criminal procedure cases may be initiated against you. You have to ensure that whatever documents, you are submitting 100 percent factual information with proper documents to the lenders.
Ways To Get Low Rates Of Interest Through Jumbo Loans
There is no denying that jumbo loan carries high-interest rates due to involvement of large amount and high risk.
As compared to conventional mortgages, you will see the stark difference in interest rates. The difference has been increasing since the recessions but in last 2 to 3 years, there is a decrease in the rates. In some cases, the jumbo loan interest is at par with the conventional loan.
Heavy demand for costly properties, high supply, and financial institutions’ willingness to give more loans to the customers, are some of the factors pushing the interest rate at a downward position.
There are no fixed interest rates on jumbo loans. Based on your applications, eligibility criteria, loan amount, and other factors, financial institutions decide the rate. It is always a better idea to approach more lenders for the jumbo loan and compare their offerings. Based on comparisons, you can settle for the one with the lowest rate of interest.
Advantages And Disadvantages Of Jumbo Loan
Just like any other thing in the world, the Jumbo loan also has pros and cons. Without knowing the merits and demerits, it is quite difficult to make the right decision.
- More money to fulfil your dream property: More money is the main principle of the jumbo loan and there is no doubt, it gives you an option to realize your dream. Not everyone can purchase the high–cost properties in the USA based on their bank balance. Jumbo loans give you a way to live luxurious life with all the superfine facilities in prime locations.
- Competitive interests rates: More demand for high-cost properties have brought down the interest rates on a jumbo loan. Experts are saying that the downward trend in the jumbo loan will continue in the future. In 2019, the jumbo loan interest was noticed slightly lower than the conventional loan for some borrowers. Properties rates are skyrocketing and people are not having enough money to spend on buying that. In that case, there is no option left other than a jumbo loan. Over the year, the demand for jumbo loans raised and the interest rate goes down.
- Low down payments: Down payment plays an essential role when it comes to property loans of any type. Down payment is the upfront payment, one needs to make to the lender before deciding the final monthly payment cycle. Let’s say, if the loan eligibility is 1000$, lenders ask 10 to 50 % as a down payment. It means, the person needs to make 100$ to 500$ upfront and then the remaining amount will be sanctioned. This is done to confirm the financial feasibility of the person. It is presumed that if someone is opting for 1000$ loan, that person must be able to make some down payment.
In the case of a jumbo loan, the down payment is lowered than the conventional loan. In a conventional loan, one needs to make 20 percent as a down payment whereas a jumbo loan comes with a 5 to 10 percent down payment option.
- Great way to earn by investing in high-cost properties: You can avail the jumbo loan for high-cost properties and later you may rent out the property for extra earnings. One way you will pay the interest and on the other way, you will recover some amount from renting. Secondly, property rates are skyrocketing day by day in the USA so your property rates are increasing and you may fetch good money once you wish to sell it. If your credit score is good, make use of the jumbo loan in making a good investment in properties.
- Need for high credit score: Jumbo loan is for credit-worthy people so you require giving a good credit score. Besides those lenders also asks for good debt to income ratio. You will have trouble landing in the jumbo loan if your score is not good, ideally above 700.
- High income earning feasibility: Lenders ask you to prove that you have solid income sources to make the loan more secure. Risk-averse lenders even ask for all the documents that will prove your creditworthiness. This requirement makes a jumbo loan, a cup of tea for only some people.
- Give all savings as a down payment: Jumbo loan indeed asks for a lower down payment but the amount is still very high for many. People earn hard to save money and they have to pay that as a down payment. All the saving goes down and you will get a property in return.
- High risk: It has been seen that people dream of a luxury house and get it through a jumbo loan. But later, while paying back the amount, they feel difficulty. Life is uncertain to a great extent and thinking about the luxurious house without considering all the facts is childish and risky. People start feeling stress after the jumbo loan in case their earning is getting dwindled. It is always advisable to leap at jumbo loans only after considering every parameter.
Down Payment Process Of Jumbo Loan
Fortunately, down payment requirements are in the range of 5 to 10 percent. Most of the lenders agree upon the down payment clause before finalizing the deal. In most cases, the down payment is considered based on these points.
- Credit scores play a vital role in getting a jumbo loan at a low down payment. The more credit score, the less you might be asked to pay upfront.
- Lenders consider Loan amount in the down payment calculation. When the amount is high, they ask for a low upfront payment and vice versa.
- Long repayment time comes with fewer down payments as lenders earn more interest in that case.
- How can we forget the earning ability and supported documents for down payment calculation? Let’s say, you are aiming for a jumbo loan, but you have a big house as an owner in some part of the USA. Here, lenders will ask for the property documents, and you will get the loan on fewer down payments.
Eligibility Criteria For A Jumbo Loan
- Credit score: lenders ask for a FICO score above the 700 that also goes high based on other facts. You can ask your financial institutions for your credit score that will help you in deciding your eligibility criteria. Some online platforms also provide a credit score that you can avail of by making some payments.
- High-income feasibility: You require showing some solid documents for good earning feasibility. People with self-employment are asked for more documents as compared to the salaried class person. It has also been seen that lenders completely ignore the income feasibility when you have high cash reserves and other properties located in the USA.
- Heavy cash reserves: The possibility of jumbo loan approval increases many folds if you have good cash reserves. Firstly, you pay as a down payment and later you have to make the repayment based on the terms and conditions. Many lenders ask you to prove that you have ample cash to cover at least one year of mortgage payments.
- Good debt to income ratio: This ratio gives a clear indication of your financial health. Let’s say, yours earning is good but you already have other loans under your account. You have to make payments for other loans that are making up to 30 to 50 percent of your earning. In that case, lenders will be reluctant to issue you any jumbo loan.
- Home appraisal: Some lenders ask for a home appraisal to get more surety about the price. A home appraisal is a process where lenders ask an independent third party to conduct a thorough inspection of the property to settle the price. Many times, lenders ask you to submit the home appraisal documents attached with your jumbo loan application.
- Solid documents proofs: You need to complement your loan application with solid financial proofs. Extensive documents such as tax returns, salary statements (for professionals), bank statements, property papers, law enforcement clearance, W-2s forms, 1099s forms, and others. Lenders also ask for other investment proofs. You also require to showcase any big liability you have in the form of documents.
Here comes the end of the articles, hopefully, you have got a clear idea about the jumbo loan. There is no better way of life than enjoying it in a luxurious property located at the prime and safest location in the USA. The jumbo loan gives you that option which is not possible in any other way.
It is quite unaffordable for most people to live that life without support from the jumbo loan. Besides that, you get an excellent way to double, triple, and increase your investment in the property. There is no denying that property offers the greatest return as compared to the other investment options with less or nil risk. Do not let your dream wait for long years before realizing it through the jumbo loan. Realize your dream and get good returns on investment with a jumbo loan.