Are you looking to purchase a home with a hefty price tag? If you need to borrow more than the conforming loan limit, which is the maximum amount permitted in your local area for conventional mortgage products, a jumbo loan could be an option. Read on to learn how they work, what you’ll need to qualify and a mortgage lender worth considering when you’re ready to move forward with purchasing the property.
What Is a Jumbo Loan?
A jumbo loan is a mortgage product that caters to prospective buyers looking to borrow an amount that’s higher than the conforming loan limit set by Fannie Mae and Freddie Mac. For the year 2022, it’s $726,200 for a one-unit property in most areas. This amount increases to $1,089,300 in high-cost areas. The conforming loan rates in 2022 were $647,200 for a single-family property in most areas and $970,800 in high-cost areas. The year-over-year changes demonstrate how much Fannie Mae and Freddie Mac can raise their rates in a single year, but a conventional loan still isn’t enough. As a result, some people will still need jumbo loans to get enough capital for their homes.
You can expect more stringent qualification criteria and typically higher interest rates with jumbo mortgage loans. Still, it’s one of the viable loan options to consider as it allows you to borrow a larger amount than the conforming loan limit in your area. Furthermore, you won’t have to pay mortgage insurance.
Jumbo Loan Limits
Unlike conventional products, jumbo loans are not subject to the conforming loan limits established by the Federal Housing Finance Agency (FHFA). So, if a conventional conforming loan does not cover your single-family home purchase, a jumbo loan can help you get your new home. In fact, loan amounts of up to $3.5 million are permitted through mortgage lenders like Angel Oak Mortgage Solutions.
Jumbo Loans vs. Conforming Loans
Although jumbo loans and conforming loans have many similarities, there are also some key differences to be aware of:
Credit Score Requirement
You will need a higher credit score to obtain a jumbo loan. The minimum credit score for a conforming loan is only 620. However, the Federal Housing Administration makes it even easier to qualify for a loan. You could even get an FHA loan with a 500 credit score as long as you make a 10% down payment. Jumbo loans are mega-sized loans that can reach $3.5 million with some lenders. You will need a high credit score of at least 680 to 700 if you want to qualify.
Jumbo Loans Have Higher Down Payment Requirements
You will have to make a large down payment if you use a jumbo loan for your financing. Most lenders will expect you to put 10% to 30% down, but you can find some jumbo loan providers that only request a 5% down payment for your luxury home. Conventional loan providers only ask for a 3% down payment, but you will have to put 20% down on a conventional loan to avoid mortgage insurance. On the other hand, you can find a jumbo loan provider that does not tack on mortgage insurance even if you only make a 5% down payment.
Even if you can get a jumbo loan with 5% down, it makes sense to put more money down if you can afford it. Home buyers who make higher down payments can qualify for lower rates and reduce their monthly payments.
Jumbo Loans Have Less Generous Debt-To-Income Ratio Requirements
Your debt-to-income ratio (DTI) is the percentage of your monthly income that covers your mortgage payments and other outstanding debt obligations. It’s capped at 50 percent for conforming loans and up to 43 percent for jumbo loans. You can improve your DTI ratio by making a high income, paying off debts, or selecting loans with longer terms, so you pay less per month on those debts.
Closing Costs
Jumbo loans and conventional loans each have their respective closing costs. You can expect to pay slightly higher closing costs for jumbo loans, but part of this comes with the territory. A jumbo loan helps a borrower acquire a home with a higher purchase price, and that price impacts your closing costs.
Down Payment
Prepare to make a down payment of at least 10 percent for most jumbo loans. If you can afford to put down more money, it won’t hurt. You’ll get a more affordable monthly payment, and your interest rate may be lower. You won’t have to worry about private mortgage insurance if you can’t put more than 10% down, but the other benefits are worth it if you have available funds.
Cash Reserves
Your cash reserves should be adequate enough to cover between six and 12 months of mortgage payments. The lender will also want to see enough cash in your bank account to make your down payment and cover closing costs for the home purchase.
Documentation
When you’re ready to apply, gather these documents to help streamline the process:
- W-2s and tax returns for the past two years
- Two most recent pay stubs
- Two most recent bank statements
- Financial statements for other forms of income, including bonuses, investment earnings and commissions
- A year-to-date profit and loss statement (if you’re self-employed)
There’s always a chance the lender will request more information, but these documents are a good starting point to get the review process going.
Appraisals
Before the underwriter can issue a “clear to close,” an appraisal is required to confirm the property’s value. This figure is used to compute the loan-to-value (LTV) and ensure it’s reasonable.
Where To Get a Jumbo Loan
It can be challenging to find the right lender to secure a jumbo loan. Fortunately, Angel Oak Mortgage Solutions works hard to provide a seamless experience to qualified borrowers looking to purchase a home that exceeds the conforming loan limits set by the Federal Housing Finance Agency.
There are three jumbo loan products that can be upset to purchase or refinance properties, to choose from:
- Gold Prime Jumbo Loan: Borrow up to $3.5 million with as little as 10 percent down to purchase a primary residence, second home or investment property. Your debt-to-income (DTI) ratio cannot exceed 50 percent, and there’s a minimum seasoning period of seven years if you have a past bankruptcy, deed-in-lieu, foreclosure or short sale.
- Prime Jumbo Loan: The loan amount is capped at $3 million, and the same seasoning requirements for adverse credit items apply.
- Non-QM Platinum Jumbo Loan: Also limited to $3 million, this loan product is a bit more flexible as you may qualify for a loan with the most recent tax return. It also has a seasoning period of just four years.
Are you looking to buy a more affordable home that doesn’t warrant a jumbo loan? Angel Oak Mortgage Solutions can also assist you with your home-buying needs. Submit an online inquiry today to discover other mortgage products that may be available to you.
