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Jumbo Mortgages

SOUTHSTAR BANK

What is a Jumbo Mortgage? 

A jumbo mortgage, or jumbo loan, is a financing option that surpasses the limits set by the Federal Housing Finance Agency (FHFA); which is any 1st lien mortgage that exceeds $484,350. 

The main purpose of these mortgages is to facilitate financing for luxury real estate in competitive markets. The dollar amounts and limits of these loans fluctuate year to year, and from place to place. What is the jumbo loan limit in 2019? As of 2019, if a property exceeds $484,350, it will most likely require a jumbo mortgage.

Highly competitive markets such as New York and Southern California, for example, have higher conforming limit sizes known as “High Balance Loans” in “High Cost” areas. Texas is not considered a “High Cost” area.

Because jumbo loans occupy more of a niche market than traditional home loans, they have unique regulations and tax implications. Also, because these mortgages are considered higher risk, they have more rigorous underwriting procedures.

However, because they offer higher risk, jumbo loans can potentially offer higher benefits. For example, since lenders have more to gain from these loans, they can also afford more services to ensure the buyer’s financial safety. Another benefit is that you aren’t restricted by Fannie Mae or Freddie Mac.

How Do You Know if Jumbo Loans are Right for You? 

Because jumbo loans are not federally guaranteed by Fannie Mae or Freddie Mac, the lender is taking on more risk than with a conforming loan of $484,350.

While there are rewards to this aspect, since the bank is taking an increased risk, you must have an above average credit score and a steady employment record in order to qualify for a jumbo loan.

Credit Score, Cash Flow, DTI and Other Financial Requirements

Most jumbo mortgages  have standard options like 30-year fixed-rate mortgages, Adjustable Rate Mortgages (ARM) and in some cases Interest Only options.   More specifically, your credit score must be above average, and your DTI (debt to income ratio) must be no higher than 43%.

If you’re self-employed, there are additional financial requirements. Since you won’t have any W-2s, self-employed borrowers are required to produce two years of tax returns and at least sixty days of bank statements.

To prove sustainable cash flow, the buyer must possess liquid assets and in many cases six months’ worth of cash reserves that equal the mortgage payment.

Review so far: 

  • Jumbo mortgage loans are designed for luxury properties that exceed the national conforming limit size (baseline asking price).
  • These loans are a higher risk for banks and require a more comprehensive financial vetting process.

Are Jumbo Mortgage Rates Higher than Conforming Loan Rates?

The short answer: not usually. APR rates for these loans used to be higher than conforming mortgage rates, but they have evened out of late.

Reasons for Higher Rates

Jumbo APRs are occasionally higher due to a few factors:

  • Who is lending the money
  • Market conditions
  • Borrower’s financial status

Note* Market conditions can also cause these mortgages’ APRs to be lower than conforming loans’.

Closing Costs

Since these loans involve a greater sum of money, closing costs may also increase. Higher risk means there will be more qualifying factors than conforming loans. Since the underwriting will take longer and require more thorough review, you should discuss closing costs with your lender and account for a potentially higher expenditure come closing time.

What Changes with Down Payments?

In the same time period that jumbo loans’ APRs leveled off with conforming loans, there has been a similar trend involving down payment requirements. Previously, it was required that a buyer place a 20% down payment for a jumbo loan. However, these days, a first time home buyer can put as little as 5% down.

While those percentages are exciting, there are also advantages to committing larger down payments in real estate. The most obvious benefit of larger down payments is that the more you pay now, the less you pay later.

Higher down payments can also favorably adjust your APR. You also can’t predict the future. In addition to smaller monthly payments, lowering your monthly mortgage rate by putting a large sum of money down will ease your stress if you ever plan on changing careers or selling your home. And, with a higher down payment, you can also avoid the added cost of private mortgage insurance.

Am I a Good Candidate for a Jumbo Loan?

You don’t have to be a millionaire to qualify for this type of mortgage. The most common candidates are in what has come to be known as the HENRY financial category, an acronym for “high earners, not rich yet.”

This category describes households who earn from $250,000 to $500,000 per year. A good tip to conceptualize whether you’re making enough money to afford a jumbo loan is whether or not you will make half the total cost of the house in a year.

If you are in the HENRY category, you may not have a substantial disposable income or accumulated assets. However, these borrowers do have enough money to sustainably qualify for a jumbo loan. If you’re in the HENRY category, it’s important to remember that determining whether you want to apply for a jumbo home loan is about more than how much money you make.

If you have great credit and a secure job with a lot of upward mobility, a jumbo loan might be ideal. On the other hand, if you have one great year, and you’re still trying to solidify your economic position and eliminate your debt, you’ll want to lower your DTI before jumping to any jumbo conclusions. 

Other Things to Consider 

As with any loan, just because you qualify doesn’t mean you have to take it. Taking a loan, especially of this proportion, requires careful deliberation. Your lender can help evaluate the potential outcomes, obstacles, and pitfalls of a loan before you commit.

Tax Breaks

Taking a jumbo loan because you think it will provide you a significant tax break is not typically advised. As of 2017, there’s a limit on the amount of deduction you can claim from a mortgage. Prior to 2017, all of your mortgage interest could be deducted. Now, however, you can only deduct interest for up to $750,000 of your mortgage debt. This may still seem like a lot, but you have to put it into perspective. For example, if you take out a two million dollar mortgage and accrue $80,000 of interest in a year, you can only claim $30,000 on your taxes.

Choosing Who You Borrow From Is Key

For some, the excitement and elation that comes from owning a house can overshadow the responsibility it requires; especially when borrowing a large sum of money. That’s why it’s especially important to borrow from and consult with the right people. Make sure you have seasoned professionals in your corner who can guide you through whether taking a jumbo loan or conforming loan is best for you.

Not all borrowers are the same. A thorough evaluation of your goals and financial situation will ultimately lead to more favorable results. Quality lenders and mortgage bankers are not only versed in their knowledge but their overall practice of that knowledge. They can understand exactly what you are looking for and put you in the correct position according to your needs. What’s more, good mortgage lenders understand the importance of trust, and never take that trust for granted.

Jumbo Mortgages: The Right Move if You’re in the Right Position

If you’re considering a jumbo loan, it’s important to remember that it is a major investment. As with any investment, there are risks to understand and evaluate in relation to your goals. Choosing to buy a house is a bold move.

What will aid you throughout your home search is learning how to eliminate unnecessary risk. That’s where mortgage brokers, real estate agents, and lenders can help you. Real estate agents, for example, can help you avoid property pitfalls. The right mortgage brokers and lenders will aid in reviewing your financial situation and connecting you with the right loan.

The bottom line is that buying a house is a major life decision. Many of our clients come to us with a conflicted outlook – excitement about a new chapter, but also worry and apprehension. Our lenders understand the loan process and work to make it as straightforward as possible.  SouthStar Bank’s flexible common-sense lenders are here to help turn your dream home into reality.

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