People who are shopping for a more expensive home, especially in a higher cost of living area, may consider a jumbo mortgage program. A jumbo loan is a type of mortgage where the amount is more than the conforming loan limits established by the FHA. So, unlike a conventional, conforming loan, it may not be purchased or guaranteed by Freddie Mac or Fannie Mae. Many economists are predicting a thriving housing market with home values predicted to soar in 2018 and 2019 and this suggests we may see a booming jumbo mortgage market. The current jumbo loan rates are some of the lowest we’ve seen in a long time, so there is plenty of opportunity.
The purpose of jumbo loans is to finance higher end homes and homes located in more expensive real estate markets. Jumbo loans are becoming more popular again in higher cost areas of the country as property values are rising.
A common question about jumbo mortgage loans is when it becomes larger than a conforming loan. It will vary by state and county, but FHA states currently that the limit for FHA properties in most of the country is $424,100. This means that a mortgage that is above that amount is a jumbo loan in most of the country. However, a jumbo loan in an expensive area, such as Los Angeles or San Francisco, is a loan that is above $636,150.
Here is a brief look at how these numbers affect the US housing market. There are 3143 counties in the US. Of all of those, 2916 have a loan limit of $424,100 in 2017. Just 108 counties have a limit of $636,150, and this includes New York City, Los Angeles, Orange County and San Francisco. Most of the high cost areas with the $636,150 conforming limit are based in California. Needless to say, jumbo loan programs are clearing important to the California housing market.
Also, there are 115 counties where the conforming loan limit is above $424,100 but lower than $636,150. Some of these counties are based in Connecticut, New Jersey, the Washington DC metro area and Boston.
Loan limits can be set even higher for counties in Hawaii; the limits there range from $636,150 to $721,000. Talk to a non-conforming mortgage lender today and find out what exactly equates to a jumbo loan amount in your region.
How to Qualify for a Jumbo Mortgage Loan
If you want to buy a home in the range of $500,000 or more, and you do not have the cash, you are probably going to need to get a jumbo mortgage loan. If you are trying to qualify, you will have tougher credit requirements. This is because a jumbo loan has a higher risk level for the lender. There is, if you recall, no guarantee from Fannie Mae or Freddie Mac that the lender will be paid back. And of course, the amount of the loan is high.
Lending requirements generally are higher than in past year, but we anticipate jumbo loan amounts to rise in 2018 as the housing market is forecasted to surge. To be approved for a jumbo home loan, you will need to have a credit score above 700 and expect to need a debt to income ratio of 43% or lower. Also, you will need to have some level of cash reserves and an acceptable income depending upon the lender.
Another requirement is to have pay stubs for the last 30 days and two years of tax returns. If you are self-employed, you will need to have 60 days of bank statements and two years of tax returns. Also, you will probably have to show you have the cash reserves to make six months of payments.
The amount that you can borrow depends upon how much money you have, your assets, credit score, and the value of the property.
Evaluating Jumbo Loan Rates Today
Jumbo loan interest rates typically have higher pricing than conventional home loans. This is because there is more risk with a higher-level loan and because it can take longer to sell an expensive home in the case of foreclosure. But the jumbo loan rates today have fallen much closer to conforming rate. For people with good credit, the rate for a jumbo home loan is often in range of what you can get with a conventional loan. In some rare instances, the jumbo mortgage rate might even be lower. But if you use a bank, you could pay 1% more for a jumbo loan.
Down Payments for Jumbo Loans
Down payment standards also have fallen in recent years for jumbo loans. At one time, lenders would require the borrower to put down at least 30%. But today, you may be able to get a jumbo loan with a 10% down payment. It makes sense to put more money down usually because you will not have to pay mortgage insurance, plus you will have a lower payment.
Who Should Get a Jumbo Loan in 2018?
Jumbo loans are usually for people who make between $250,000 and $500,000 per year. These types of people are known in the industry as high earners but not rich yet, or HENRY. They are people who have high incomes but do not yet have millions in cash reserves. These borrowers usually have the credit scores and incomes to qualify for these higher risk loans, even though they do not have millions in assets yet.
Tax Implications on Jumbo Mortgage Interest
Most home buyers can write off the interest on their mortgage payments. But for some jumbo loans, this write off is phased out. For mortgages that are above $1 million, you will not get the full tax deduction. For example, if you have a $2 million loan and have $60,000 of interest per year, you only can tax deduct $30,000 under current US tax law. So, you are only getting the tax break on the first part of your loan. It will be interesting to see if the GOP tax reform bill will continue to allow $1,000,000 mortgage interest deductions or if they will limit it to $500,000 as rumored.
A jumbo loan is a good option for the higher income borrower who has the credit score to qualify. It also is the only option for many borrowers in expensive parts of the country. Be prepared to need a higher credit score, income and down payment to qualify.
References: Jumbo Loan Overview. (n.d.). Retrieved from https://www.investopedia.com/terms/j/jumboloan.asp