Financial institutions offer various types of mortgages to enable their clients to finance purchases of their desired properties. In this article, we will discuss jumbo loans. Read on to understand what they are and how they work.
Understanding Jumbo Loans
Jumbo loans are mortgages that exceed the limits specified by the Federal Housing Finance Agency. They are intended to finance purchases of luxury homes and properties in highly competitive real estate markets. Jumbo loans became popular after the Great Recession when the US real estate market experienced a massive recovery.
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It is worth mentioning that jumbo loans have several tax implications, and their lenders require borrowers to fulfill strict requirements.
Benefits of Jumbo Loans
The major benefit of jumbo loans is that borrowers are able to obtain mortgages that exceed the Federal Housing Finance Agency’s limits, which vary from one county to another. The national average limit as of May 2024 is $766,000, up from $726,000 in 2023. Counties that have higher home values enjoy higher limits. They include Hawaii, Guam, and Alaska.
Cons of Jumbo Loans
If you are looking to buy a property that costs $1 million or more and do not have enough deposit in your bank account, then you need a jumbo loan. As mentioned earlier, your lender will expect you to meet strict requirements, which can be challenging. These requirements are necessary because of the high credit risks associated with Jumbo loans.
How Does a Jumbo Loan Work?
Over the past decade, minimum requirements for jumbo loans have become more stringent. As of 2024, your credit score must be above 700 to get loan approval. Moreover, your debt-to-income ratio should be favorable.
Before qualifying for a jumbo loan, the lender will need you to provide proof that you have access to sufficient cash to cover your monthly payments, which can be considerably high if you choose a 30-year fixed-rate jumbo mortgage.
The amount of jumbo loan you can borrow depends on your income level. For this reason, your lender will request pay stubs received over the past 24 months if you are employed or three recent bank statements if you are self-employed. Also, you will be required to submit documentation showing all your outstanding debt.
Jumbo Loan Rates
Compared to conventional home loans, jumbo mortgages have higher interest rates. However, the rates have been declining over the past few years. As of May 2024, the average annual percentage rate for jumbo loans is 6.5%. Well-known lender Wells Fargo lowered the rate from 7.1% to 6.4% in December 2023.
Down Payment on Jumbo Loans
The requirement for down payments has loosened in recent years. About a decade ago, jumbo loan lenders used to request homebuyers to make a 30% down payment on their property purchases. Today, that figure is down to 10%. Still, it is advisable to make a higher down payment if you can to avoid various costs associated with small down payments.
Who Should Borrow Jumbo Loans?
As mentioned, the jumbo loan amount you can secure depends on your income, credit score, and assets. As such, jumbo mortgages are ideal for individuals on the “HENRY” (high earners, not rich yet) level. These people earn between $250,000 and $600,000 annually.
If you are in the HENRY category, the lenders believe that you have a better credit history and credit scores than an average homebuyer. Therefore, you are likely to qualify for a jumbo loan.
Special Considerations for Jumbo Mortgages
Even if you qualify for a jumbo loan, it does not mean you should apply. You first need to understand aspects like local and state taxes. If you take out a jumbo loan to buy a property that attracts high taxes, owning that house will be costly.
Conclusion
Jumbo loans are a convenient way of financing for homebuyers who wish to purchase high-value properties. However, understanding the downsides of these loans before taking one is important.