Jumbo Loans

Do you want to live in a luxurious home or buy an investment property, but you don’t have enough money to pay for it in cash? If you have to take out a mortgage, you will need to get a jumbo loan. Also referred to as non-conforming mortgages, these loans don’t have the same restrictions that conforming mortgages do. That means you can get the cash you need for an expensive property.

What Is a Conforming Mortgage?

Before you can understand jumbo loans, you need to take a look at conforming mortgages. Conforming mortgages refer to the mortgages that conform to the federal guidelines. Fannie Mae and Freddie Mac buy conforming mortgages from lenders, providing lenders with liquidity. That allows them to make more mortgages.

The government added a conforming loan size limit that caps the amount of money that lenders can provide. In California, conforming mortgages are limited to $580,750.

That means if you want to borrow more than $580,750, you have to get a jumbo mortgage.

Jumbo Loan Limits – What You Need to Know

Jumbo loans allow you to borrow more money, but just how much can you get? As with any type of loan, there are jumbo loan limits that you have to take into consideration before purchasing a luxury property.

Lenders can provide jumbo loans for up to $3 million for California residents. You can get this money as a fixed rate mortgage or an adjustable rate mortgage. It is a good idea to understand which option works best for you before securing the money. That way, you won’t have any surprises when you move forward with your jumbo loan.

Jumbo Loans as Fixed Rate Mortgages

Fixed rate mortgages are a popular option for people who want jumbo loans. This is the right option for people who want consistency. Your payments will never change for the duration of your loan, and your interest rates are locked in. That means you don’t have to worry about any surprises with a fixed rate mortgage.

If you choose a fixed rate mortgage, you will have to decide how long you want to take the loan out for. You can take it out for a minimum of 10 years and a maximum of 30 years. Keep in mind that the shorter the loan’s duration, the higher the payments will be.

On the other hand, the longer the loan’s duration, the more interest you will pay over the course of the loan.

If you have the money, it is a good idea to take out a shorter loan so you won’t have to pay as much back. If you can’t make large monthly payments, though, extend the length of the loan.

Find out if you qualify for a loan.

Pros and Cons of a Fixed Rate Mortgage

If you are thinking about moving forward with a fixed rate mortgage, it is important to consider the pros and cons. This will make it easier to decide if you want to go with this option.

Many people choose jumbo loans because:

• They provide stable interest rates and payments.
• The market can bottom out, and you will continue paying the same rate.
• If interest rates go down, you can refinance and lock into a new rate.

Even though there are many benefits, there are some drawbacks, as well.

For instance:

• You won’t automatically benefit if market rates go down.
• Initial interest rates are often higher than ARM rates.
• Initial mortgage payments are often higher than ARM payments.

Want a fixed rate mortgage for your jumbo loan?

Jumbo Loans as Adjustable Rate Mortgages (ARM)

Adjustable rate mortgages are another option. If you get this type of loan, your interest rates and payments will change over the course of the loan. The interest rate will go up and down based on the market rate, and those changes will impact your payments.

You do have the option of placing caps on your ARM so the interest rates and payments don’t balloon past what you can afford to pay.

Pros and Cons of an Adjustable Rate Mortgage

As with any type of mortgage, there are pros and cons to consider. People like ARM loans because:

• The jumbo loan rates are often lower than fixed rate mortgages.
• They offer protections through caps.
• They provide lower interest rates when the market rate decreases.
• They offer lower payments when interest rates decrease.

You do need to consider some cons, as well. These include:

• The rates increase when the market rate increases.
• The monthly payments increase when interest increases.
• Negative amortization can occur due to caps.

Do You Qualify for a Jumbo Loan?

For the most part, lenders use the same guidelines they use for conforming loans when determining if you qualify for a jumbo mortgage. They look at your down payment, debt-to-income ratio, and credit score. If your credit score is at least 680, most lenders will give you a jumbo loan. If your score is higher, you can get better terms.

There are some differences that are worth considering, though.

First, while lenders do want you to put down a down payment, you can put down less than 20 percent without having to get mortgage insurance. In fact, many lenders will take as little as 10 percent down.

You also don’t have to show as much paperwork regarding your income. For instance, let’s say you are self-employed with a strong work history. If you want to get a conforming loan, expect to show proof of income that goes back two years. You can likely get away with showing a single year for a jumbo loan.

You can also get away with having a higher debt-to-income ratio if you are getting a jumbo loan. The key is to have cash reserves on hand after you close on the loan. If you can do that, your debt-to-income ratio can exceed 43 percent.

Not sure if you qualify?

Do You Qualify for a Jumbo Loan?

For the most part, lenders use the same guidelines they use for conforming loans when determining if you qualify for a jumbo mortgage. They look at your down payment, debt-to-income ratio, and credit score. If your credit score is at least 680, most lenders will give you a jumbo loan. If your score is higher, you can get better terms.

There are some differences that are worth considering, though.

First, while lenders do want you to put down a down payment, you can put down less than 20 percent without having to get mortgage insurance. In fact, many lenders will take as little as 10 percent down.

You also don’t have to show as much paperwork regarding your income. For instance, let’s say you are self-employed with a strong work history. If you want to get a conforming loan, expect to show proof of income that goes back two years. You can likely get away with showing a single year for a jumbo loan.

You can also get away with having a higher debt-to-income ratio if you are getting a jumbo loan. The key is to have cash reserves on hand after you close on the loan. If you can do that, your debt-to-income ratio can exceed 43 percent.

Not sure if you qualify?