Most home buyers looking for a new home to buy, will need a lortgage or loan to buy a home. Certain mortgages for higher priced homes are called jumbo loans. Not everyone will need a jumbo loan, but for a select group of potential homeowners, jumbo loans help them purchase homes of higher value. A jumbo loan is a type of financing that can be more stringent that a conventional mortgage with different eligibility requirements. Jumbo loans are a financing option for those interesting in buying luxury homes or properties with a higher than average value. Understand more about jumbo loans and who may qualify for this home loan mortgage option.
Explore a Jumbo Loan
There is a conforming maximum loan limit that the Federal Housing Finance Agency sets. The limit has been set at $484,350 for a property that is one-unit and located in the contiguous United States. Limits may be subject to change. Some areas of the country with higher home prices have higher conforming loan limits. Potential homebuyers looking for a loan above that limit may be disappointed to find that a single conventional loan will not be applicable.
Buyers will then need to look into a jumbo loan. This type of loan is not guaranteed by Fannie Mae or Freddie Mac. A jumbo loan may be seen as higher risk as it is not guaranteed by federal agencies. Interest rates on a jumbo loan are often higher than those set on a conventional home loan. Jumbo loans are also available for multi-unit properties and homes in high-cost areas, but the limits are higher.
Aside of conforming jumbo mortgages, or those exceeding the maximum limit, there are non-conforming jumbo loans. Such a loan may be applicable to a very specific buyer. This type of individual will exceed the jumbo limit or be a loan type that cannot be allocated to another category. Interest-only loans with ending balloon payments may be an example of this type of non-conforming jumbo mortgage loan.
There are fewer borrowers for jumbo loans than conventional loans. Borrowers will need to pay back a larger loan amount at a higher interest rate on a jumbo loan.
The Changing Limit
The limit can vary and is announced each November for the following year. When home prices rise, so does the minimum limit of a jumbo loan. For example, the previous limit of $453,100 rose to $484,350 this year. High-cost, competitive counties in the U.S. can have limits that reach $726,525. Such limits may be found in areas like Los Angeles and New York City. It is important for potential buyers to learn of the current limit when looking to see whether a conventional or jumbo loan is appropriate.
The property cost should run nearly $500,000 or more in order for a jumbo loan to be a practical option. Credit score requirements are generally high for this loan. Borrowers should have:
- A credit score of 720 or more;
- A debt-to-income (DTI) ratio lower than 43 percent;
- Proof of income, such as two years of tax documentation; and
- Liquid assets that may be used to make mortgage payments for six months.
High income earners, making $250,000 or more, are generally good candidates for this type of loan. However, they must be able to show relatively low debt levels compared to their income in order to be considered for this loan.
Changing tax laws may make an impact on the size of a tax break a jumbo loan borrower may receive. Homeowners can generally deduct mortgage interest when itemizing deductions. However, with the new lowered cap, homeowners may not be eligible for a previous amount. Depending on when a home was purchased, a borrower may only be able to deduct interest on a mortgage debt of up to $750,000. The tax break will only apply to that amount of the loan, even when the borrower is paying off a $2 million jumbo loan. This may give pause for prospective Sundance Hills home buyers who want to purchase a home and receive a tax break on the entire amount of their loan.
Potential Risks Associated with Jumbo Loans
There is a small pool of people that qualify for jumbo loans. The types of homes purchased are generally luxury residences, which can be hard to sell quickly. Luxury homes are more susceptible to valuation shifts than homes that are moderately priced. More buyers and sellers exist for homes valued around the national median. This can make it hard for an owner with changing financial circumstances to find a qualified buyer. They may also see that their home does not maintain its initial valuation. However, this second issue can also apply to buyers of average priced homes, as changing market conditions often impact the assessed value of properties.
Contact a qualified jumbo loan lender to learn more about local limits and eligibility requirements.