The Advantages and Disadvantages of a Jumbo Loan
If you are dreaming of purchasing an expensive house or you just want to relocate in an area with high property values, you will probably need a jumbo loan.
“Jumbo mortgages are home loans that exceed conforming loan limits. A jumbo loan is one way to buy a high-priced or luxury home. If you have a lower debt-to-income ratio, a higher credit score, and a larger down payment, a jumbo loan may be right for you.” According to usbank.com
Jumbo Loan Basics
As the number of loan requests for jumbo loans is increasing so is the number of lenders willing to offer jumbo mortgages. These type of home loans have reached 24% of the total mortgage approvals in 2015 compared to 21% in 2014 while in 2012 jumbo mortgages accounted for just 12%.
In US jumbo loans are available for loans greater than $417,000 up to $3 million. In most counties, any mortgage of more than $424,100 is considered to be a jumbo loan. In those counties with high home prices, the conforming limit is higher and it can go up to $625,500.
Here's the loan-limit breakdown for 2016 for the 3,143 counties in the United States
- 2,997 counties have the lower limit for a jumbo loan at $424,101.
- 103 counties such as Los Angeles, New York City and San Francisco have the loan limit set at $636,150.
- 131 counties have loan limits in between $425,500 and $625,500.
- 4 out of Hawaii's 5 counties have limits between $657,800 and $721,050. For Alaska, Guam, Hawaii and the Virgin Islands there is a long-standing regulation in place that allows these higher limits
Advantages of Jumbo Loans
- Access to Large Amounts of Money. The main advantage of a jumbo loan is being able to borrow the money that you need to purchase a luxurious property.
- Convenience. With a jumbo mortgage, you will not need to approach two or more lenders to get the necessary amount to purchase the desired property. Instead, you will have to manage just one mortgage and only one monthly installment.
- Different rate programs. You can choose from a variety of loan programs; allowing to choose the loan terms that best suit your needs and requirements. You could get a fixed rate loan or a mortgage with an adjustable-rate.
Drawbacks of Jumbo Loans
- Higher interest rate than for a traditional mortgage. Interest rates are generally higher than the ones offered for standard mortgages as they are riskier than traditional loans and the lenders have to charge more to compensate for the risk that they are taking on when issuing these loans. The typical interest rates are usually 0.5 to 1 percent over the rate of a regular loan. Also compared to conventional loans where are many institutions offering mortgages when it comes to jumbo loans it is just the opposite; resulting in a higher interest rate.
- Difficult to find and to be approved. There is just a few lender that you can consider for a jumbo loan and they will require you to document a substantial income in order to afford this type of loan. The down payment for jumbo loans is usually higher than for a traditional loan, depending on the lender, you will be asked to put down 15%, 20% or even 30% for a property purchase.
- Stringent credit requirements. With home jumbo loans, you be able to show the underwriter you have the financial capability to handle this kind of a loan; this includes a good credit history. The lender will pull a copy of your credit report in order to make sure that your credit score is high enough to get approved. Also expect lower debt ratio allowances & no foreclosures in the last 7 years.
For a more in-depth understanding be sure to consult with your mortgage broker. Casey Moseman can help you understand the differences between different types of jumbo loans and what needs to be prepared when applying for this type of mortgage. Together you can find the mortgage that best suits your financial situation.