A jumbo loan may be a wise choice for home buyers requiring a larger loan than the local conforming loan limit, which is $726,200 in most areas of the United States. Jumbo loans, also called non-conforming mortgages, are designed for people who want to buy more expensive residences. 

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If you want to purchase an expensive property or a home in a high-end area, consider getting a jumbo loan as a potential option. The following guide includes everything you need to know about this type of loan, from discussing how to qualify for one and analyzing the pros and cons.

A Basic Understanding of Jumbo Loans

A jumbo loan, also called a jumbo mortgage, allows eligible home buyers to borrow amounts greater than those permitted by conventional mortgages. This type of loan can be used to finance primary, secondary, or investment properties but is most often used for higher-priced homes that are too expensive to qualify for a traditional conforming mortgage. 

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A jumbo loan or jumbo mortgage has a loan amount that exceeds the Federal Housing Finance Agency (FHFA)'s conforming loan limits. The FHFA determines the conforming loan limit for each area on an annual basis. The baseline limit in 2023 for most parts of the country was set at $726,200 and $1,089,300 for high-cost areas. A mortgage loan exceeding these amounts would be considered a jumbo.

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Due to the substantial size of jumbo loans, they are riskier than conforming loans. To offset this risk, lenders usually have stricter requirements.

What Are the Requirements for A Jumbo Loan?

To qualify for a jumbo loan, borrowers often must adhere to more stringent requirements than a conventional mortgage. That is due to the increased risk mortgage lenders take in giving out more significant loan amounts.

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While qualifications may vary from lender to lender, the following are some of the most common qualifications laid out by jumbo loan lenders:

Credit Score

To qualify for a jumbo loan, you need a good credit score. Most lenders require a FICO score of at least 700, while others set their minimum at a higher level. Mortgage lenders use your credit score to determine your financial stability. A good score shows that you are responsible with payments; therefore, there's less risk of defaulting on your loan.

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Lenders will also look for potential negatives and red flags on your credit report, such as missed or late payments, foreclosures, and bankruptcy. Potential negatives on your credit report may impact your ability to obtain a jumbo mortgage loan.

Debt-To-Income Ratio

In addition to checking credit reports, lenders also examine debt-to-income (DTI) ratios. Your DTI expresses the relationship between how much debt you have and how much income you generate. 

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According to the Consumer Financial Protection Bureau, jumbo loans must still meet the guidelines of the standard lending system, such as a DTI ratio of 43 percent or below. Nonetheless, some lenders will prefer a ratio closer to 36 percent. Your credit score and DTI are critical factors impacting your ability to obtain a jumbo mortgage loan.

Down Payment

Jumbo mortgage loan down payment conditions have historically been higher than conventional mortgage purchase transactions. Where conforming loans often require 20 percent of the property's purchase price, lenders may require up to 30 percent for jumbo loans.

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These requirements have been relaxed recently, with some lenders now requiring as little as 10 to 15 percent. If the down payment is less than 20 percent, the lender may mandate private mortgage insurance until a specified loan-to-value (LTV) threshold is met.

Cash Reserves

Borrowers must prove that they have enough money in their bank account to pay for the closing costs and future mortgage payments before getting approved for a jumbo loan. Most lenders require cash reserves for at least 6-12 months of payments. 

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Mortgage lenders want the assurance that borrowers will not default on the loan and can afford the monthly payments. Therefore they request proof of cash reserves for at least the first few months. Depending on the loan amount, lenders may require bank statements to verify the amount of cash reserves on hand.

Documentation

In addition to a stellar credit score, a minimal DTI ratio, a large down payment, and proof of cash reserve statements, borrowers may also be asked to provide extensive documentation as proof of the borrower's financial status. Such documented evidence may include full tax returns, W-2s, bank statements, and investment accounts that account for the borrower's income and assets.

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Some lenders will also require a documented home appraisal to confirm the value of the property being considered for purchase.

Jumbo Loan Rates

Jumbo loan rates are often higher than conventional ones because they pose a greater risk to lenders. Many lenders also require additional documentation and other conditions to qualify for a jumbo loan. Note that jumbo loan rates can vary by lender, so it is essential to shop around to compare rates and find the best rate available.

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• Interest Rates: Interest rates for jumbo loans can be higher than conventional loans but can also be more advantageous for those looking for higher loan amounts. 
• APR: A jumbo loan's Annual Percentage Rate can vary widely depending on the lender, loan size, and borrower's credit history. Alas, they are generally higher than conventional loans due to risk.
• Fees: Charges by lenders on loans that exceed the set mortgage limits. These fees tend to be higher than traditional mortgages and can range from one to three percent of the loan amount.
• Points: Fees associated with the origination of a jumbo loan. They range from 0.25 - 2 points but are typically around 1 point. Points cover the lender’s origination costs and risk and can often result in higher interest rates than those associated with a conforming loan.

Where and How to Find Jumbo Mortgage Lenders?

Jumbo mortgage lenders specialize in providing loans for home buyers who need mortgages that are larger than the loan limits set by conventional lenders. These lenders provide home buyers with up to a million dollars in financing, allowing borrowers to purchase more expensive homes. To find the proper lender for a jumbo loan, compare several options based on factors such as down payment amount, interest rates, lender fees, customer service, and more.

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Many jumbo mortgage lenders offer a variety of loan products tailored to meet the needs of different borrowers, including low-down payment options, adjustable-rate mortgages, and competitive rates and terms. They understand the unique financial needs of their customers and strive to provide the best solutions for their clients. 

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Whether you are a first-time homebuyer or an experienced investor, a jumbo mortgage lender can help you find the best loan option for your needs.

What Are the Jumbo Loan Limits?

For 2023, the conforming loan limit for one-unit homes throughout most nationwide counties is $726,200, with high-cost places like the West Coast reaching up to $1,089,300. Jumbo loan limits vary by area and can be higher in some places than others. Contact a local lender for the most up-to-date jumbo loan limits in your preferred location, or check with the FHFA for more information.

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The FHFA sets the conforming loan limits each year, which are overseen by Fannie Mae and Freddie Mac - the two government-sponsored enterprises (GSEs) that purchase a significant number of mortgages from lenders in the U.S. and then resell them on the secondary market to investors. 

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With these limits in place, lenders can make more loans available to borrowers as they can sell them to the GSEs. That reduces the risk to the lender if the borrower cannot make repayments. Loans that exceed the conforming loan limits, such as jumbo loans, carry more risk for the lender.

County

Jumbo loan limits vary by county and can be loftier in high-cost areas due to the price difference across real estate markets. When looking at places to buy, remember that what may qualify as a jumbo loan in one county may be different from the next county. Loan limits set by the FHFA each year get based on the median home prices within each specific county.

State

Jumbo loan limits do not always vary by state but can be heightened within the high-cost areas of some states. When shopping for a property, remember that these loan limits may differ within a state depending on the county. The only exceptions are Alaska and Hawaii, where limits are the same state-wide.

Federal

Jumbo loans are mortgages that exceed the conforming loan limit set by the Federal Housing Finance Agency. Any loan amount higher than the federal limit is considered a jumbo loan. Alas, it is essential to note that jumbo loan limits can vary by state and county.

Jumbo Loan Calculators

Wesley Mortgage offers a mortgage calculator that estimates monthly payments and an amortization schedule for a given loan. It is simple to use; all you have to do is input the mortgage amount, the length of the loan period, the interest rate, and insurance expenses. Enter these details to calculate how much you would pay monthly or annually in principal and interest. Please note this is only an estimate:

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https://www.wesleymortgage.com/calculators

Payment Estimate

Follow the below steps to calculate an estimate of one's monthly mortgage payments:

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1. Enter the loan amount: this is the home's asking price or what you expect to pay
2. Select the loan term: 15 or 30-year terms are the standard options. A 15-year loan has higher monthly payments, while a 30-year term incurs more interest over the life of the loan.
3. Fill in the interest rate: Contact a Wesley Mortgage advisor for the most up-to-date rates that lenders currently offer.
4. Pick a start date: Choose a date on which you plan to close on the mortgage loan to account for anticipated changes to the real estate market.
5. Click the "Calculate" button: The results include estimates of the monthly payment, the total cost over the loan term, the total interest cost, and the expected pay-off date. Below, you will also see an amortization schedule that can be viewed as monthly or annually for a further breakdown of the loan balance over time.

Affordability

This estimated snapshot of a mortgage's monthly payments is beneficial when determining how much of a loan you can afford. The calculator has several unique features that help to give the most robust estimates. That includes toggling between loan terms to see the cost differential over the life of the loan and having areas to include additional monthly expenses such as mortgage insurance, hazard insurance, and real estate taxes.

Refinancing a Jumbo Mortgage

Refinancing a Jumbo Mortgage is a great way to save money and reduce monthly payments. This type of loan is more expensive than a traditional mortgage and requires a larger down payment. It is vital to ensure that your current financial situation can handle the additional expense of the loan.

Benefits

There are several potential benefits of refinancing a jumbo mortgage, including:

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• Higher mortgage financing limits: Jumbo loan refinancing is not restricted by the limitations mandated by the FHFA.
• Reducing multiple loan payments: Refinancing a jumbo loan allows borrowers to forgo acquiring numerous loans and can instead have one regular payment schedule.
• Improving interest rates: Depending on the market, you can secure a lower interest rate, which can lead to lower monthly mortgage payments over the life of the loan.
• Changing the loan type or loan term: Altering the loan type can give borrowers more stability and predictability. Also, shortening the term can help save on interest over the life of the loan, while lengthening the term can reduce monthly payments.
• Consolidating debt and accessing home equity: Free up additional cash flow by consolidating high-interest debt into the mortgage or using the built-up home equity for a larger loan.

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It is important to note that refinancing can have costs associated with it, such as closing costs, appraisal fees, and title searches, so it is important to weigh the benefits of refinancing against the costs to see if it makes sense for your individual situation. It's best to consult with a lender to understand the costs and benefits of refinancing and the specific requirements for refinancing a jumbo loan.

Costs

When refinancing a jumbo loan, closing costs are increased due to their higher principal balance. Often, borrowers can expect to pay between two and six percent of the total loan amount in closing costs during a refinance. For instance, if you are refinancing a $600,000 jumbo loan, you may have to pay between $12,000 and $36,000 in cash upfront at closing (unless you choose to roll it into your loan, which may increase both your rate and your principal balance).

Process

Jumbo refinancing is manually underwritten, which can elongate the refinancing process compared to conventional loans. The abundance of paperwork necessitates an extended review, and lenders are more thorough as the risk is greater. If any discrepancies or red flags are spotted, further delays may occur, or you may get asked to reapply later. You will then have to devote time to rectifying the problems before reapplying.

Requirements

Standard qualifications to meet to refinance a jumbo loan are similar to those when initially taking out such a mortgage. These standards include having a great median credit score, a DTI ratio well below the industry standard, and proof of adequate cash reserves in the event you face financial hardship later down the line. Higher-risk jumbo loan borrowers may face even more restrictions.

What Are the Advantages of Jumbo Loans

Below are several benefits that come with a jumbo mortgage:

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• You Can Borrow More Cash: Jumbo loans give you access to higher mortgage loan amounts to buy the type of property you desire, as long as you meet the requirements. 
• You Can Put Less Than 20% Down: You can choose between a 20% down payment and a smaller down payment with private mortgage insurance (PMI) to get a jumbo loan. Based on your budget, income, credit history, and other qualifications, this can help you save a lot of money upfront and help you become a homeowner faster.
• You Can Get VA "Jumbo" Loans: Conventional loan products aren't the only jumbo loans you can get. VA loan-eligible borrowers can also get jumbo loans from the Veterans Administration.

What Are the Disadvantages of Jumbo Loans

Below are a few examples of the downside to taking out a jumbo mortgage:

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• You Need A High Credit Score: You will need help getting a jumbo mortgage loan if your credit score is less than 700. However, if you can put down a higher down payment, you might be approved for a jumbo loan even if your score is slightly lower.
• You Must Have a High and Stable Income: Lenders take on substantially greater risk with jumbo loans, so it makes sense that they're stricter about approving them. You must establish a consistent annual income and considerable personal financial assets to qualify. 
• You Need A Huge Cash Reserve: Lenders need to know that, no matter what happens, you can pay your loan back for at least the first several months or so. You should set aside 6-12 months' worth of mortgage payments when you finalize your jumbo mortgage loan.

Jumbo Loan Alternatives

Jumbo loans are only for some people as they are just necessary if higher loan limits are needed. There are several alternative options, including:

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1. ‍Conventional loans: These loans, which the government does not back, have stricter guidelines and lower loan limits (typically $510,400 for single-family homes) than jumbo loans.
2. FHA loans: These loans, which the Federal Housing Administration backs, have more lenient guidelines and lower credit score requirements than conventional loans, but they also have lower loan limits (typically $356,362 for single-family homes) than jumbo loans.
3. VA loans: These loans, which the Department of Veterans Affairs backs, have more lenient guidelines and lower credit score requirements than conventional loans, but they are only available to military veterans and active-duty service members.
4. Portfolio loans: These loans are made by banks and other financial institutions and held in their portfolios rather than being sold on the secondary market. They can have more flexible guidelines and higher loan limits than conventional loans.
5. Combination loans: This type of loan allows you to borrow above the conforming loan limit by combining a first and second mortgage. The interest rate on the first mortgage would be lower than a jumbo loan; however, the second mortgage would typically carry a higher interest rate.

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It is important to note that these options may vary based on the lender and location. It is best to check with a lender for your area's specific guidelines and limits.

Tax Implications For a Jumbo Mortgage

The tax implications of a jumbo loan are similar to those of a conventional loan. Mortgage interest is tax-deductible on loans up to $750,000 for mortgages taken out after December 15, 2017, and before December 31, 2025, and $1,000,000 for mortgages taken out before December 15, 2017. 

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If you have a jumbo loan, you may be able to deduct the interest you pay on your loan from your federal income taxes. However, if the mortgage amount exceeds the cap placed by the Internal Revenue Service (IRS), it will not be eligible for a full reduction tax break.

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In addition, if you use the loan to purchase or improve a primary residence, the interest on the loan may be tax-deductible. Yet, the interest may not be tax-deductible if the loan is used for other purposes, such as investing in a rental property or a second home.

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It is important to consult with a tax professional or accountant to understand the tax implications of a jumbo loan, as the tax laws and regulations are subject to change and the repercussions may vary based on individual situations.

Conclusion

Jumbo loans are not for everybody. But if you meet the requirements and want to purchase an expensive home that exceeds the loan limits of the conventional pathway, then go for a jumbo loan. If you are still determining whether a jumbo loan is suitable for you, contact Wesley Mortgage to discuss your options! 

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Wesley Mortgage has a team of dedicated advisors who work hand in hand with you to get you a fitting mortgage. Whether your goals are rapid home ownership, getting the lowest interest rate possible, or finding a payment that works for you, we can help.

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