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Jan 2017

Taking Out a Jumbo Loan

Are you considering a jumbo loan or curious about one? As the name implies, a jumbo loan is a larger loan size that subsequently makes it a jumbo decision. However, a jumbo loan can have big advantages for qualified applicants. No matter where you are in your journey to homeownership, you should fully research and understand the definition, benefits, and process of taking out a jumbo loan. The following guide is a great place to start.

What exactly is a jumbo loan?

A jumbo loan is a mortgage loan that’s higher than the conventional conforming limit. Conforming limits are annually set by the Federal Housing Finance Agency. These limits outline the maximum loan amount government-sponsored enterprises (Fannie Mae and Freddie Mac) are willing to purchase on the secondary market. When an amount exceeds Fannie Mae and Freddie Mac’s limit, that loan is referred to as a jumbo mortgage. These limits may vary by location, and are subject to change annually based on the national average home price. For the last decade, the conforming limit has been $417,000. However, the limit has increased to $424,100 in 2017. In some high-price regions like New York City, the limit could be as high as $636,150. However, keep in mind this is not a limit on the purchase price, but instead on the loan amount.

Any home loan exceeding the conforming loan limit is considered a jumbo loan, often referred to as a non-conforming loan.

Two differences between jumbo loans and conforming loans are jumbo mortgages often have a slightly higher interest rate and a higher down payment is required.

Is a jumbo loan right for me?

A jumbo loan may be a good choice if you’re looking to finance over $424,100, and you have a high credit score, a low debt-to-income (DTI) ratio, and a large down payment. Many people believe jumbo loans are only for valuable, luxury homes, but that’s not always the case. A jumbo loan might also be a good choice if you live in an area with high real estate costs, where finding a home within the conforming loan limits is more difficult.

Will I qualify for a jumbo loan?

To qualify for a jumbo loan, a borrower will typically go through a more stringent process than a conforming loan. And specific credit and DTI requirements will vary slightly from lender to lender. As with any home loan, lenders closely review your income and assets to ensure you have the ability to make your monthly payments. In addition to your mortgage payment, be sure that you’re comfortable keeping up with any additional costs, such as taxes (usually the biggest additional expense), maintenance and upkeep, as well as furnishing and decor. Insurance is another important factor to consider. Since jumbo loans are frequently used on more expensive (often times coastal) properties, be sure that you’re sufficiently covered in case of a major disaster or total loss.

What are the perks of a jumbo loan?

A jumbo loan may have big advantages for qualified recipients. It allows you access to funds that exceed conforming limits, which means purchasing a higher-priced, even luxury home is more attainable.

In addition, jumbo loans are available in different rate options, so you can have the flexibility to choose between a fixed-rate and adjustable-rate mortgage, depending on what’s best for your lifestyle. Are you looking to purchase a second home? Some lenders may offer a jumbo loan on a second home, making this a good choice for those looking to buy a second, perhaps vacation, property. There are also tax benefits associated with jumbo loans that make them an attractive choice for many homebuyers. Each month, part of your payment consists of interest. All of the interest you pay is tax deductible if your loan is less than $1 million, or $500,000 if you are married and filing separately. However, keep in mind this a general rule of thumb and there are some restrictions. Always contact a tax professional for specifics.

What do I do to prepare?

Due to their larger size and loan qualifications, jumbo loans require a bit more paperwork in order to properly complete an income and credit analysis. Understandably, the larger the loan, the larger the risk, thus requiring a more in-depth analysis. Uncertain if a jumbo loan is right for you? Contact a mortgage banker to see if you qualify.