The jumbo loan is a loan that has given freedom to many borrowers in need of some breathing room. Not every real estate deal can fit into the neat little box of a conforming or conventional loan package; thus the jumbo loan. However, bigger is not always better when it comes to buying property. Here are the 10 questions that you should be asking yourself before you commit to a jumbo loan package, even if it seems like the perfect solution to your borrowing needs.
1. What exactly defines a loan as a jumbo loan?
A Jumbo loan is meant to serve as a way to buy higher value properties. It is the big brother to the conforming loan, a loan with a payment limit of $417,000 in most cities, $723,000 in higher value areas such as New York and California.
2. Do I need a down payment with a jumbo loan?
Because of the additional risk that lenders take on by giving out a higher sum of money, the down payment is also higher. In most cases, lenders will require an additional five percent on top of the 20 percent minimum as a guarantee of buyer equity in the property.
3. Do jumbo loans allow for refinancing options?
A jumbo loan may be refinanced in the same manner as a conforming loan; however, the closing costs that are associated with this process are much higher than a conforming loan. Lenders will offer an agreement known as an extension and consolidation agreement specifically for jumbo loans. An extension and consolidation agreement keeps the borrower from paying mortgage tax twice.
People who are looking to refinance on a jumbo loan will also receive a title insurance discount. This is hardly a replacement for the closing costs in the immediate future, but it does tend to even out over time. This 50 percent discount is required by law in most cases.
4. Can I use a jumbo loan for a second property or an investment property?
In large metropolitan cities like New York, you would actually be hard pressed to find a property within conforming loan limits, even as those limits are raised as mentioned above. In certain parts of these cities, a jumbo loan is required because of the price of the housing there. For this reason, people are allowed to use jumbo loans on primary residences.
In order to help people pay back these loans, lenders will sometimes offer longer terms. Some jumbo loan terms can last as long as 50 years. Lenders may also give borrowers the option of interest only payments.
5. Do I have to pay private mortgage insurance (PMI) on a jumbo loan?
The jumbo loan follows the same industry standard as the conforming loan: You can avoid the PMI payment as long as you keep at least 20 percent equity in your home. This means that you should come to the table with at least a 20 percent down payment and never borrow more than 80 percent of the value of the home. PMI is an optional charge for a lender as long as the loan to value ratio stays under 80 percent.
6. Why do jumbo loans have higher interest rates than conforming loans?
Lenders consider individuals who require jumbo loans a higher risk, even though these borrowers often have higher credit scores and more stable financial profiles. Because of the sheer amount of money that is being given to the borrower, the lender overcompensates and usually charges a higher interest rate than in the case of a conforming loan.
7. How do I qualify for a jumbo loan?
Jumbo loan qualifications are usually much higher than for a conforming loan or a loan that is insured by a government entity. In most cases, the borrower cannot look into a partnership that a low income or a bad credit borrower would use. You will need a stable income, a record of consistent payment history to creditors, and gainful employment that can be verified by the lending institution.
8. What kind of a credit score do I need for a jumbo loan?
Most people who are approved for a jumbo loan have a credit score than is above 700, People with a credit score above 740 get the best rates. 620 is an industry standard absolutely minimum for a jumbo loan, although individual lenders can do whatever they want.
9. How long does it take to process the paperwork for a jumbo loan?
Because of the amount of money that is involved and the additional scrutiny that private lenders employ, a jumbo loan can take up to a month to process, especially for a first time jumbo loan buyer. Do not become discouraged if you have not heard from your lender; simply stay in touch and apply for more than one loan.
10. Why would I skip over a jumbo loan?
The higher interest rates, origination and closing costs, and additional financial scrutiny make using a jumbo loan difficult for some buyers, especially those who are on the cusp of the conforming loan limit. If you are buying a home that is just above the limit for a conforming loan, you may want to see if you can negotiate with the seller for a lower price. You may also be able to use a combination loan to stay within conforming loan limit guidelines.
2 Point Highlight
Because of the sheer amount of money that is being given to the borrower, the lender overcompensates and usually charges a higher interest rate than in the case of a conforming loan.
Because of the amount of money that is involved and the additional scrutiny that private lenders employ, a jumbo loan can take up to a month to process, especially for a first time jumbo loan buyer.
