Jumbo Loan

Jumbo Home LoanAre you contemplating a home purchase for a large dollar amount and unsure of your options? One option that may be a good fit is a jumbo loan.

Whether it’s the increasing cost of homes or the various guidelines lenders must follow, jumbo loans are becoming more popular.

Here is an overview of what jumbo loans are and how they may differ from conventional mortgage loans.

What is a Jumbo Mortgage Loan?

When we hear the term ‘jumbo’, we think of large or plus size, which is the perfect definition of jumbo loans. Jumbo loans are plus-size loans that are for dollar amounts larger than conforming loan limits.

The loan limit for jumbo loans may vary by area. In most parts of the United States, the threshold for jumbo loans is $453,000. What this means is that a mortgage loan should be more than $453,100 to be classified as a jumbo loan.

In areas where homes are more expensive, the threshold for jumbo loans is $636,150. The Federal Housing Finance Agency has set higher limits in areas like Guam, Hawaii, Alaska and the U.S. Virgin Islands. Honolulu, Hawaii has the highest conforming loan limit for jumbo loans at $721,050.

How Are Jumbo Loans Different from Conforming Loans?

Traditional mortgage loans are often referred to as conforming because they conform to government guidelines regarding things like credit, debts and loan size.

Although jumbo loans and conforming loans are both used to purchase homes, this is almost where the similarities end.

Below are the differences between the two.

  • Conforming loans often originate with one lender but then are bought out by banks like Freddie Mac and Fannie Mae, which are government-backed lenders who underwrite and scrutinize mortgage loans on the open market. Jumbo loans, on the other hands, are not purchased by Freddie Mac or Fannie Mae.
  • Jumbo loans must be over a certain dollar amount to be considered jumbo loans.
  • Mortgage interest rates are typically lower for conforming mortgage loans. The main reason is because conforming loans are guaranteed by Freddie and Fannie whereas jumbo loans are not, which makes them riskier.
  • Jumbo loans are not offered at as many banks and lending institutions as conforming loans. This kind of brings in the supply and demand analogy. The fact that they’re offered at fewer banks is typically why jumbo loans come with higher interest rates and stricter terms.
  • Jumbo loans require higher down payments.
  • Jumbo loans generally require higher credit scores. Whereas conforming loans may allow credits scores in the 600s, jumbo loans often like to see credit scores as 700 or higher.
  • Higher closing costs are usually part of jumbo loans because the dollar amount is higher, and there is often more paperwork involved.
  • Some jumbo loans require the borrower to have some cash reserves equal to several months of mortgage payments.
  • Jumbo loans typically have stricter guidelines for applicants. One example is that some jumbo loans require two home appraisals rather than just one.

Benefits of Getting a Jumbo Loan

After reading about the differences between conforming and jumbo loans, one might think lenders should steer clear of jumbo loans. However, that is not the case at all. As will all types of mortgage loans, there are pros and cons to jumbo loans.

Below are some benefits of jumbo loans.

  1. In recent years jumbo loans are becoming more affordable in terms of interest rates.
  2. Jumbo loans offer attractive tax breaks regarding interest paid. Borrowers can claim interest payments on loans up to $1 million.
  3. Jumbo loans do not require private mortgage insurance.
  4. Jumbo loans make it possible for home buyers to purchase high-priced homes.
  5. Lower interest rates are possible with higher credit scores.

Are Veterans Eligible for Jumbo Loans?

The good news for veterans is that they are also eligible for jumbo loans as long as they satisfy the eligibility requirements for mortgage loans and for jumbo loans. The main difference between VA loans and regular loans is that VA loans are guaranteed by the Department of Veterans Affairs.

However, although the VA’s loan guaranty program may not have a maximum dollar amount that at veteran can borrow, they do have a limit of how much they’ll guarantee.

Except for a few counties that have higher-priced homes, the maximum amount the VA will guarantee as of January 1, 2018 is $453,100.

So, does this mean that veterans can’t get a jumbo loan for a home that’s $500,000? Absolutely not!

What it means is that the VA will only guarantee up to $453,100, and the veteran will have to pay 25 percent of the amount over $453,100.

For instance, a veteran has found his dream home for $600,000 and applies for a jumbo loan. The VA will guarantee up to $453,100, so the veteran will have to pay a down payment of $36,725, which is 25 percent of the amount over $453,000.