Is a Jumbo Loan the Best Option When Buying Luxury?
What is the jumbo loan, is it the best option when buying a luxury property, and how does one go about applying for a jumbo home loan?
A jumbo loan is a mortgage used to finance properties that are too expensive or high-priced for a conventional conforming loan. The maximum amount for a conforming loan is currently $554,250 in most counties across the country. Homes that exceeded the local conforming loan limit require a jumbo loan.
How do you qualify for a jumbo loan?
Lenders use a variety of factors when determining qualifications and requirements for a jumbo loan. They will look at your credit score, debt to income ratio, cash reserves, finance documentation, appraisals, down payment, and the borrower may incur higher interest fees and closing costs.
Borrowers typically need a credit score of at least 720 to qualify for a jumbo loan but that's just the first step. Debt to income ratio and cash reserves are a big part of jumbo loan approvals. Borrowers obviously need to make enough to support a monthly mortgage payment for the inflated amount.
How does a jumbo loan work?
These large home loans, higher than the conforming limit set by Fannie Mae and Freddie Mac will require larger downpayments, typically up to 25%. They work very similarly to a conventional loan but limits, rates, and qualifications are typically higher.
How do jumbo mortgage rates work?
Lenders typically charge higher interest rates on jumbo home loans because there is a lot more risk involved. However, many rates are still very competitive with today's typical market rates. The difference between conforming and non-conforming loans range from just .25% to 1%, and in some cases, jumbo loans may have rates that are actually lower than other mortgage loans depending on the type of program and the borrower's financial situation.
What kind of property can I buy?
Most borrowers can buy a variety of properties with a jumbo loan as long as they meet the lender's other requirements. There are currently no government restrictions on how to use jumbo loan financing as you can use it for primary residences vacation homes and even investment properties. VA home loans may also work but you'll need to meet the VA property standards just as you would with a standard VA home loan.
Credit scores are definitely a factor to applying and qualifying for a jumbo home loan. Most lenders will require at least a 700 credit score to acquire a jumbo loan for a one or two unit property with a loan limit of up to $1 million. Beyond that up to $1.5 million, the necessary credit score is 720. Between $1.5 million and $2 million, borrowers will need at least a 740 credit score. If you're buying a second home, you'll need a credit score between 720 and 740 depending on the loan amount.
Debt to income ratios are also an issue. This means how much debt you have going out each month compared to how much income you have coming in. A low debt to income ratio is important when applying for a jumbo loan because it informs lenders that you have enough cash flow throughout the month to cover mortgage payments and any emergencies that might come along. For a jumbo loan for most mortgage lenders, you'll need a debt to income ratio between 38% and 43% maximum in order to qualify. Of course, anything lower than that is always more attractive to lenders.
Basically, if you're planning on a home loan larger than $510,000 or thereabouts, you'll need to apply for a jumbo loan. Not every lender deals with a jumbo loan so it's important to find a Maryland luxury mortgage lender that specifically knows how to handle and deal with jumbo loans and has connections to lenders that work in the jumbo loan markets. Feel free to call contact us at any time for information on jumbo home loan officers in our area or for more information on buying luxury homes in Southern Maryland and neighboring communities and towns.
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David Keys, Waterstone Mortgage
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