LOAN PROGRAMS
Jumbo loans
Jumbo Loans – Everything you Must Know
What is a Jumbo Loan?
Jumbo non-QM loans are a type of mortgage loan that is designed for high-value properties that exceed the conforming loan limits set by government-sponsored enterprises Fannie Mae and Freddie Mac. These loans are considered to be non-qualified mortgages, as they do not meet the strict underwriting guidelines of traditional conforming loans. We’ll take a closer look at jumbo non-QM loans and how they can benefit borrowers.
One of the key advantages of jumbo non-QM loans is that they allow borrowers to finance the purchase of high-value properties that may not be eligible for a traditional conforming loan. This can be especially helpful for borrowers who are looking to purchase luxury homes or properties in high-cost areas.
Another advantage of jumbo non-QM loans is that they can offer more flexible terms and conditions than traditional conforming loans. For example, some non-QM loans may allow borrowers to have a higher debt-to-income ratio or a lower credit score than would be required for a conforming loan. This can make it possible for borrowers who may not qualify for a traditional conforming loan to obtain financing for a high-value property.
When applying for a jumbo non-QM loan, borrowers will need to provide detailed financial information and documentation, such as tax returns and bank statements. The lender will then review this information to determine the borrower’s ability to repay the loan.
It’s important to note that jumbo non-QM loans may carry a higher interest rate than traditional conforming loans, as they are considered to be higher risk. As a result, borrowers should carefully compare offers from different lenders and consider the total cost of the loan before deciding which option is best for them.
Debt-to-Income Ratio Requirements
Your debt-to-income ratio compares your total monthly debts to your gross monthly income or income before taxes.
The debts included in your DTI include the new mortgage payment (with real estate taxes and homeowner’s insurance), minimum credit card payments, student loan payments, personal loan payments, and car payments.
The fewer obligations you already have when applying for a jumbo loan, the easier it is to qualify.
Cash Reserves
Most jumbo loans require cash reserves, you’ll have in a liquid account after making your down payment and paying the closing costs. Lenders measure your reserves by how many months of mortgage payments they cover.
The Pros and Cons of Jumbo Loans
Like all loan programs, there are pros and cons to jumbo loans you should understand.
Pros:
Higher Loan Limits
The first benefit of a jumbo loan is that they are, well…jumbo-sized. Jumbo loans can be used to purchase bigger properties in areas where the housing market reflects higher average home prices. For homebuyers who don’t want to or can’t put down that much cash, a jumbo loan is actually a necessity for getting the property they want.
One Single Loan
A jumbo loan is going to be a single mortgage, which beats having to collect multiple loans in order to finance a property. As it turns out, most consumer-facing banks would be reluctant to extend a mortgage if another lender is involved, since it could present conflicts in regards to collecting the collateral of the property in the case of a default.
You Can Leverage Your Investment
You can leverage your investment with jumbo loan financing if you want to invest in a more expensive home. This may open up more opportunities to invest in homes in high-cost areas or buy a home you’ve always wanted but don’t have the cash to buy outright.
Cons:
A High Credit Score is Needed
You will need very good credit to obtain a jumbo loan. This is a significant amount of money being extended by a bank, and they do not want to lose it through the foreclosure process. Even if a home is high priced or a very sizable asset, banks are not in the business of selling distressed properties, so they would rather get paid on time than take ownership of the house.
Higher Interest Rates
Jumbo loans are still a significant credit risk, not only because the loan amount is so high, but also because the bank cannot resell the loan to be repackaged as a mortgage-backed security. In some of these cases, the bank will make up for this credit risk by charging higher interest rates.
A Cash Reserve Maybe Required
At the close of a jumbo loan, borrowers may need to supply (lock up) an additional 12 months of cash reserve to obtain their loan. This is insurance for the lender in case the borrower has financial troubles.
Jumbo Loans vs. Conforming Loans
The major difference between jumbo loans and conforming loans is the loan amount. Because of the higher risk, jumbo loans have higher interest rates and stricter underwriting requirements. You can’t walk into just any bank and get a jumbo loan. You must meet their requirements which can be different for every lender.
For example, most conforming loan lenders don’t require borrowers to have reserves on hand. However, most jumbo loan lenders require it as a backup should your income stop. They want to know you can make the mortgage payments beyond a reasonable doubt.
Final Thoughts
Jumbo loans are a great way to acquire a more expensive home than conforming loans. Regardless of what kind of home loan you’re considering taking on, keep in mind that the type of loan and loan amount needs to make sense for your financial situation.
When it comes to jumbo loans especially, you should consider whether or not you qualify based on the stricter requirements, and whether or not such a large loan will be financially comfortable for you. If you aren’t sure, it never hurts to discuss your situation with your mortgage loan originator.