If you’re simply looking for a nice two or three room home in which to raise a family, you probably don’t need to worry about jumbo loans. On the other hand, if you’ve found a really great job or you’ve come into a nice big sum of money, you may well hope to upgrade your life with a home in the hills, a mansion, a beautiful ranch out in Arizona.
Taking out a jumbo loan is usually a big decision. Maybe not if you’re a millionaire, but for the rest of us it’s a major commitment. You’re generally looking at both higher monthly payments and a longer loan period as well.
So what makes it a jumbo loan?
The Limits Of A Jumbo Loan
A jumbo loan limit is usually $417,000. Anything over that and you’re looking at a jumbo loan. In the higher-cost areas it can be closer to $625,000, or even higher. In Los Angeles, for instance, the jumbo loan limit is set at $729,750.
If you’re relying on the VA loan, know that a VA loan guaranty may actually cover your jumbo loan, although it’s a fairly narrow margin. The typical jumbo loan limit is $417,000 while in most areas the VA loan caps off at $424,100. This only gives you $7,100 of breathing room, and the fees incurred when taking out a jumbo loan usually cost more than that.
That said, it is possible to use your VA loan as the foundation of a jumbo loan. They’re not going to guaranty the full $800,000, but you still have options available to you. With a large down payment or another form of income or a different lender or something to put up for collateral, the VA loan can get you part way there so that you can find a way to cover the gap.
What’s The Difference?
If the rules surrounding a jumbo loan were the same as any other loan, “just more expensive,” then we wouldn’t need the term “jumbo loan.” So, what’s the difference? What is it that sets a jumbo loan apart from a typical loan?
The main thing is that jumbo loans will not be backed by Freddie Mac and Fannie Mae. The lenders that are willing to back these loans are taking on a significant risk in comparison to a conventional loan. This means that a jumbo loan comes with a long list of requirements. If you’re leaning on a VA loan, then even if you can find a jumbo-loan-priced home that you can squeeze into the VA loan limits, your lender will still likely hold you to higher standards, including the following:
- Your credit has to be just about perfect. If you want to live in a luxury condo or buy a home in a competitive market and your credit is not that great, then you may be able to buy the home with cash if you have the money to finance it yourself. But if you want to take out a loan, you need to have a very high credit score and a fairly clean history. Most lenders are looking for at least a 700, and they may decide to turn you down anyway if you have any major “red flags” on your record.
- You need some pretty solid proof of income. You’ll want at least two years of paperwork showing your income. Tax documentation should be enough. Lenders are looking to see if you can cover at least six months of payments on the mortgage, while some may be holding you to even higher standards.
- You need to have good DTI. DTI is your Debt To Income ratio. This is everything you spend in a month divided by everything you make in a month. So if your bills, groceries, car payment and so on add up to $3,000 and your monthly income is $6,000, then you have a DTI of .50. In shorthand, you can call that “fifty cents,” as in you spend fifty cents of every dollar you make. The lower your DTI, the better. Most lenders are looking for a DTI under .43, but your lender may be seeking something much lower for a jumbo mortgage. This can vary from lender to lender as they have to assess their own risks, their level of comfort with whatever it is you can bring to the table compared to what you’re borrowing.
- You may need to put down a hefty down payment. Although the VA loan program can help to eliminate the need for down payments on a “conforming loan” this might not be the case when you ask your lender to cover a jumbo loan. You may be looking at a down payment anywhere from 10.1 to 15 percent. This means that you’ll need to have at least $42,000 on hand just to move in. For many, this is the big stumbling block. Maybe they can afford the payments, maybe they have perfect credit, but coming up with tens of thousands of dollars up front is a tall order. If you can afford it and you absolutely must have that beautiful home in the Hollywood
hills, it’s worth it. But if this is outside the realm of possibilitythen it may be a good idea to look at homes in a more reasonableprice range or wait until you’ve put a little more into your savings.
…But Here’s The Good News
Luckily, it’s not all hurdles and setbacks and higher interest rates when taking out a jumbo loan. There are some parts where the bike ride goes downhill, so to speak.
- You might wind up with a lower APR. Generally speaking, jumbo mortgage Annual Percentage Rates are about on par with conforming loans. In many cases, they’re even lower. The incredibly high standards placed on jumbo loan borrowers allow for a little more flexibility in this regard.
- You can deduct mortgage interest on your taxes. On a conventional loan, these deductions might only add up to a few thousand. On a jumbo loan, they can easily add up to the tens of thousands. The downside is that there is a one million dollar cap on the mortgage amount. This doesn’t mean you don’t get to make deductions on the interest for a three million dollar loan, only that you need to divide that deduction by three.
The Future Of Jumbo Loans
All signs point to a shift towards accessibility when it comes to jumbo loans. We’re seeing more banks and lenders leaning towards lower interest rates, more in line with conventional loans. Although the standards are likely to remain very high when it comes to your credit history and the assets, liquid and otherwise, that you have to back up your loan, banks and lenders generally see the value in having these borrowers as clients.
Many banks, lenders and other financial institutions offer more than just loans. They offer wealth management, they broker investments and so on. For these groups, helping a wealthy client with great credit means that you can keep earning commissions as long as you keep making life easier for them. Not that we need to tell you that financial organizations are eager to please the wealthy, but as the housing market continues to stabilize, lenders are becoming more willing to take a more expensive risk in order to earn reliable clients with a lot of money to invest.
I Was Denied, What Now?
The thing about luxury real estate is that nobody really needs a mansion in Beverly Hills. That’s why it’s called luxury real estate. But, if that’s your dream then that’s your dream. If you can’t find a lender who will cover you, then you do have a few options:
- Bring your DTI down. Suppose that, technically speaking, you can cover the payments, but your DTI doesn’t look that good on paper. There are a lot of ways that you can fix this, and they boil down to either increasing your income or lowering your monthly expenses. Paying off old loans with lump sums can help. If you have any property out there that you’re sitting on, you can rent it out or sell it. You can invest in a startup for some extra income or move into a smaller apartment just to bring your expenses down for a little while.
- Improve your credit. If you’re in the market for a jumbo loan, then you have the financial weight to improve your credit. Any old debts that need paid, any discrepancies on your record that need to be cleared up, you can pay them off of hire an attorney to help you to set the record straight.
- Be patient. Maybe you’re well on your way to that dream home on the beach, but you’re not quite there yet. We’re talking about a home that some people spend their entire lives saving up for. Spending a couple more years making advancements in your life and in your career may be all it takes to close the gap.
Although lenders are looking to take on more high-value borrowers through offering jumbo loans, the risk involved remains, and jumbo borrowers have also been shown to default at a higher-than-normal rate.
The issue that many borrowers have when it comes to jumbo loans is that they get to be a little too eager. They may struggle through much of their life, and when they get their dream job, when they come into money through inheritance or when their Bitcoin stock goes through the roof, the first thing they do is upgrade their living quarters.
But, they might not be planning for the long term. So they take out a big loan not realizing that the industry in which they’ve made their fortune may be a bubble that is about to burst. They assume that their dream job will be there forever, not realizing that there is an ebb and a flow to the economy, that what’s hot right now might not be forever, and that it’s better to diversify and invest. So a year goes by, or two years go by, or five or even ten, and their situation changes, and they can no longer afford the home, and they can’t find a buyer to take it off their hands, so they default on the loan.
Our advice to avoid this: Wait until you’re sure you’re ready, don’t pin your dream home on a “maybe,” and invest, invest, invest. If your money isn’t making you money, then you’re not wealthy just yet no matter what you have in the bank. Find a trusted broker, start a business, or a whole string of businesses, and make sure that you’re able to cover your jumbo loan payments even if you go from dream job to between jobs sometime in the near future.