People who want to buy an expensive home, such as in many areas of California, will probably need a jumbo mortgage loan and rates remain near record lows. These jumbo loans also are referred to as non-conforming loans. If you are considering a jumbo loan, you will need to have a complete understanding of these higher balance mortgages, as well as possible jumbo mortgage rates and costs.
Overview of Jumbo Mortgages (AKA -Non-Conforming Loans)
Let’s first understand what a conforming loan is. Fannie Mae and Freddie Mac back mortgages, meaning that they will pay off the lender for a large percentage of the mortgage in case of default. The government does this so that banks have more liquid cash so that they can provide more mortgage loans to average Americans.
For a loan to be conforming, it must meet certain critical guidelines so that the government will guarantee it. These loans are thus referred to as ‘conforming’ loans.
One of the most critical parts of a conforming loan is the size of the mortgage. For most of the United States, the conforming home loan limit is $417,000 for a single family home. In some expensive parts of the country – California and New York City – the limit is currently $625,500 as of 2017.
Most of the US is covered by the conforming limit of $417,000:
- 2916 counties have the $417,000 cap
- 108 counties have the cap of $625,500
- 115 counties have their cap set at a range between those two numbers; those areas have prices higher than average, but not as ‘high cost’ as the ones with a limit of $625,500
- Four of the five counties in Hawaii have a cap that is between $657,000 and $721,000
Where do jumbo loans come in? Basically anything that goes above the limits above is called a jumbo mortgage. These loans are thought to be non-conforming, and Fannie and Freddie will not guarantee them. The US government cannot by law back such loans, and may not purchase them either. Fannie and Freddie only may purchase money that meet strict government guidelines for size of down payment, size of the loan and credit score. In most cases jumbo mortgage rates are higher than conforming interest rates according Freddie Mac.
How to Get Approved for Jumbo Loan
After the mortgage meltdown in 2008, it became harder to qualify for a jumbo mortgage. You typically needed to have a very good income, low debt to income, a lot of money down, and excellent credit.
These days, we are not back to the Wild West in lending, but things are more flexible. For example, your down payment for a jumbo mortgage can be as low as 10% in some cases for loans of $1 million. Back in 2010, the minimum down was 20%.
A benefit of jumbo loans is that they do not often require mortgage insurance; mortgage insurance is used for conforming loans to pay for reimbursing the lender if the home owner defaults. But in the case of jumbo loans, the government does not guarantee them, so there is no need to normally pay for mortgage insurance.
However, remember that borrowers often need to pay a higher jumbo mortgage rate of approximately .25% when compared to conforming loans. Also, your debt to income ratio for a 10% down jumbo loan have to be from 30-36%.
Note however, that in recent years, sometimes non-conforming jumbo mortgage rates have been the same or even lower than conforming loan rates.
If you come to the closing table with 20% down, the lender may allow you to have a higher debt to income ratio. You total housing payment each month and your other monthly obligations should not be more than 43%, and you then can be approved in many cases.
Of course, your credit score is a factor here. If you have a credit score under 680, it will be tough to get approved for a jumbo loan. Lenders usually want to see at least a 720 FICO to get a jumbo mortgage. Some banks may want to see a score of 750 or higher. If your score is at least 780, you will almost certainly be approved.
Another factor is your level of cash reserves. This is how much liquid cash you have in your bank account after the jumbo mortgage is closed. The requirements for cash reserves are stricter for jumbo or non-conforming loans.
Jumbo mortgage lenders often want to see a year of cash reserves after you close the loan. About 50% should be liquid, and the rest can be in retirement accounts.
Jumbo loans can be nearly essential in more expensive parts of the country. Otherwise, many potential homebuyers can be shut out of the real estate market. Jumbo loans also are good for people who simply want to buy a more expensive home.
When it comes to the interest rate, you will need to pay a bit higher rate for the larger mortgage. This is after all a higher risk for the lender. But if you have good credit and good income, you should be able to get a jumbo mortgage loan for no more than .5% above conforming mortgage.
Note that some lenders may offer re-amortization on some jumbo loans over $417,000. This means that the payment can drop as you pay on the loan. Depending upon the jumbo lender, a pay down on your balance from $5k to $20k could get the payment recalculated. You could lower your monthly payment as you continue to pay on the loan.