For home buyers seeking a luxury home, jumbo mortgages are the easiest way to borrow a lot of money for a property. Jumbo loans create greater risk for the lender. Because of this additional risk, qualifying for a jumbo loan can be more of a challenge. Knowing what a jumbo mortgage is, what it takes to qualify for a jumbo mortgage and what kind of risk is involved can help the home buyer decide if a jumbo mortgage is right for them.
What Is a Jumbo Loan?
A jumbo mortgage is a mortgage that is higher than the conforming loan limit of $417,000. Jumbo loans are usually used to acquire luxury properties. Often, jumbo loans are used to buy a primary residence or vacation home. Sometimes, these mortgages are used to purchase an investment property. In some expensive home markets, jumbo loans are required to purchase more modest homes, simply because the cost of housing in those areas is so high.
How Do Jumbo Loans Work?
For the borrower, jumbo loans work much the same as a regular loan would. Your lender will work with the borrower to make sure they are a good candidate for the loan. Since the loan is for a higher dollar amount, the requirements to qualify may be a bit more challenging.
One thing to consider is that jumbo loans require more effort and more risk from lenders. Therefore, unless the lender is working in a housing market where nearly every loan is a jumbo loan (such as in some places in New York or Southern California), it is important to make sure the lender has experience in these loans. The lender will often have a firm requirement for PMI (private mortgage insurance.)
After the application process is complete and the loan is offered, paying the mortgage is the same as for any other loan—just with a higher payment.
What Are the Benefits of a Jumbo Loan?
A jumbo loan is a good way for a homeowner to access large sums of money to purchase a property. For many homeowners, the alternative to borrowing a jumbo loan is to take out two or three mortgages. By comparison, a jumbo loan is easier to manage.
What Are the Disadvantages of a Jumbo Loan?
Jumbo loans have slightly higher interest rates compared to standard mortgages. This is because jumbo loans involve more risk for the lender. The higher interest rates help offset the risk, to make jumbo loans a viable type of loan for standard lenders.
In general, jumbo loans are harder to refinance, and because the loan is so large, fluctuations in the market are more likely to reduce equity and put the homeowner under water.
How Do Jumbo Loans Compare to Standard Loans?
Standard mortgages vary in their requirements, so it's hard to compare jumbo loans to all other mortgages. However, in general, jumbo loans require the home buyer to put more money down, have more money on hand and have a better credit rating than standard mortgages.
For example, an FHA loan requires the home buyer to put down 3.5% of the purchase price of the home. Home buyers with a credit score as low as 500 points can qualify for an FHA loan.
Home buyers who borrow a jumbo loan must put down at least 20% of the purchase price of the home. They must also have at least six months of mortgage payments in their savings account and must have a credit score of at least 700 points.
How Can You Tell If A Jumbo Loan is Right For You?
Jumbo loans are best for home buyers who have a solid financial history, good credit rating and a lot of financial responsibility. In general, lenders are able to determine which borrowers are right for a jumbo loan by looking at their bank statements, work history and credit history.
Contact Your Lender
If you're a homeowner who would like to purchase a luxury or high-priced property, you may need a jumbo loan to make your purchase. To find out whether or not a jumbo loan is right for you, contact a knowledgeable Goodlettsville lender for more information.
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