With many home prices between $250,000 to $500,000 or more in areas across the country, it is simply not reasonable for buyers to make such a large purchase with cash. After all, it may take the average person several decades or longer to save up that amount of money. You may not realize, however, that there are different types of home loans available to mortgage loan applicants. The two primary options for a typical purchase or refinance loan request are a conforming loan and a jumbo loan. You may be wondering what is a jumbo loan and how this type of financing may impact your home loan options.
The Concept of a Jumbo Loan
If you are thinking about applying for a new loan soon, it is important to understand what is a jumbo loan. A conventional loan is a loan amount that falls under a specific limit, but this limit varies based on which county the home is located in.
The standard limit is $417,000. Therefore, a loan amount less than $417,000 is a conventional loan in most areas. While a loan amount over $417,000 is considered to be a jumbo loan. When you ask what is a jumbo loan, however, you also need to be aware that there are 3,143 counties where the jumbo loan limit is actually higher.
These are areas that are known to have more expensive real estate prices. For example, the jumbo loan limit in some New York metro area counties and Los Angeles area counties is $625,500. The highest jumbo loan limits are in Hawaii, and the limits in this state range from $657,800 to $721,050.
You should be aware that the limits are adjusted regularly in various counties. So you should take time to research the current jumbo loan limits in the counties you are considering moving to as a first step in the financing process.
Jumbo vs. Conventional Loan
It is important to learn more about what is a jumbo loan before you apply for a mortgage. Consider that a conventional loan may have a lower interest rate and different loan qualification factors than a jumbo loan.
Remember that there are different ways to structure a loan. So you can take advantage of the pros and cons of a jumbo or a conventional loan strategically.
For example, if you need a $450,000 loan amount, you may apply for a full jumbo loan. Otherwise, you may apply for two conventional loans that include a first and second lien. Both lines fall under the conventional loan limits so that the total loan proceeds equal $450,000.
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Advantages and Disadvantages of a Jumbo Loan
After you learn what is a jumbo loan, you may be wondering what type of loan you should apply for. As you might imagine, there are both pros and cons associated with these two unique options. A closer look at these benefits and drawbacks may help you to decide how to proceed.
However, you may find it beneficial to ask your loan representative to provide you with estimates for several jumbo and conventional loan options as they may be relevant to your specific financing needs.
Advantages of a Jumbo Loan
1. You can obtain a higher loan amount
If you are wondering what is a jumbo loan and why you may want to apply for one, the most obvious answer relates to money. You may even get a straight first lien with a loan-to-value of 90% or higher when you apply for a jumbo loan.
This means that you could reduce the amount of money that you need to use as a down payment. You also do not have to worry about qualifying for a first and second lien. Additionally, you don’t have to worry about trying to manage payments on two mortgages regularly.
Furthermore, you will not have to pay closing costs for two loans. Which may save you several thousand dollars or more at closing.
2. Competitive rates and flexible terms
The loan terms and underwriting requirements for jumbo loans are also different than with a conventional loan. For example, one jumbo loan lender may allow you to have a higher debt-to-income ratio. This means that you could potentially qualify for a higher loan amount and loan-to-value.
You may find that the total monthly debt is lower with a high LTV jumbo loan than with a first and second lien structure. This is because jumbo loans have very competitive rates in most cases.
On the other hand, the interest rate on a second lien may be much higher. The average interest rate on the two lien structure may, therefore, be higher. With a higher average interest rate, you may find that your equity accrues slower than it would with a low interest rate jumbo loan.
Disadvantages of a Jumbo Loan
1. The primary rate may be higher
When you learn more about what is a jumbo loan, it is important to analyze the downsides associated with this type of loan as well.
The rate on a jumbo loan may be more affordable than the average rate on a two-loan structure. However, the primary rate on the jumbo loan is usually higher than the first lien rate on a conventional loan.
If you are in the position of applying for a loan right on the borderline of the jumbo loan limit, it may be worthwhile to put down slightly more money and to get a lower conventional loan interest rate.
2. Underwriting requirements may be difficult to meet
You should also be aware applicants for jumbo loans may need to prove a substantial amount of income as well as liquid assets. The underwriting guidelines may be easier in some regards with a jumbo loan, but borrowers may find that the requirements are more difficult for them to meet.
Jumbo loans also usually have a higher credit score requirement. It may be much easier for you to qualify for a conventional loan if you have a good or fair credit rating.
This is because many jumbo loan programs require loan applications to have a great or excellent credit rating. You may qualify for a conventional loan and not for a jumbo loan, or vice versa.
Considering Both Options
Now that you are aware of what is a jumbo loan, you may be wondering which option is best for you. Some borrowers are more sensitive to the down payment and closing costs requirements. While others may be more sensitive to the amount of the monthly payment.
For example, you may have limited available liquid assets. So you may be acceptable to a higher monthly payment as long as you get the loan amount you need.
On the other hand, you may have a very tight debt-to-income ratio. This may not qualify you for a loan that has a higher amount or a higher interest rate.
If you are wondering what your loan options are, it is important to learn more about the requirements for each type of loan in your area. Determine what the jumbo loan limit for your county is to start with. Then, you can speak with a loan representative to learn more about the different loan structures that may be well-suited for your situation.