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Jumbo Loan 101: What to Know Before Going Large

For most homebuyers across the country, a conventional loan is enough for their purchase. However, in high-market areas like San Diego, large sums of money are needed to purchase even a moderate home. After all, a million-dollar home in San Diego is certainly not extravagant.

But the FHA and other government organizations only support loans to a certain amount. If you need more than their limit, you’ll likely use a jumbo loan. Before you apply for a jumbo loan, however, you have to understand the details so you can get the best possible price.

11 Things You MUST Know About Jumbo Loans

1. They Are Not Just For Primary Residences

You might assume that because jumbo loans create higher risk for the lenders, they would only be available for primary residence (which, statistically speaking, have a lower rate of default). However, these loans can be used to purchase many types of property, including secondary homes, vacation homes, and investment properties. The details may change with other types of property, but jumbo loans can be used for a wide range of purchases, not just your primary residence.

2. The Loans Come in Various Types

Just like jumbo loans are available for various properties, the loans can also come in various types. For example, depending on the lender you can find a 30-year fixed-rate, a 15-year fixed-rate, or an adjustable-rate jumbo loan. This gives you more options for working the loan into your specific needs.

Aerial view of San Diego with boats in harbor
In markets like the San Diego area, a jumbo loan may be needed for moderate housing.

3. They’re Not Just for Mansions

When people think of jumbo loans, they often think of opulent, lavish mansions that cost tens of millions of dollars. While they are certainly not for low-market housing, jumbo loans are often used for moderate housing, or at least the upper-level of moderate, in some areas. For example, the limit for FHA loans in San Diego County is $649,750. As anyone who has searched for a home in our area can tell you, there are many homes that are above and beyond this price. So if you want to purchase a $700,000 home, which is certainly not a mansion in San Diego, you may need a jumbo loan. In other areas, the limit can be below $300,000, which means many buyers will need something beyond the FHA limits.

4. There is No Government Agency Involved

One of the defining factors for jumbo loans, beyond just the high amount, is the fact that no government agencies are involved in the process. They are not backed by the FHA, and  neither Fannie Mae nor Freddie Mac, two government-supported corporations, will purchase the loans on the secondary market. This lack of government support means lenders are extremely diligent when approving the loan application.

5. You’ll Need a Large Downpayment

If you plan on using a jumbo loan, be prepared to bring a significant down payment. The larger the loan becomes, the more money you’ll need for a down payment. While a 20% down payment may not be required, it can help you secure a better interest rate, which translates into significant savings when you consider the loan total.

6. You’ll Need Good (or Stellar) Credit

For government-supported loans, there is a specific credit score that is required, which is usually a mid-level score; as long as you have decent credit, you should be approved. But with jumbo loans, the required score is up to the lender, and you will likely find that jumbo loans require a credit score of 680, 700, or even higher.

7. Interest May (or May Not) Be Higher

It’s a bit of a myth that interest rates on a jumbo loan are always higher. Yes, interest rates can be higher, but this is not a given. In today’s market, the competition among lenders to profit from jumbo loans is high, and many are offering lower interest rates to help win over borrowers.

8. Large Cash Reserves Are Required

While certain factors are generally flexible (credit score and interest rates, for example) some things in jumbo loans are almost universal, including cash reserve requirements. With larger loans, the lender will want to see that you have enough cash reserves to support the loan should you come across financial difficulty. You’ll likely need cash reserves that can support the loan payments for at least 6 months, although some lenders may require as much as a full year’s worth of cash reserves.

9. Mortgage Insurance Can Often Be Avoided

Mortgage insurance is designed to protect lenders in the event of a loan default. Almost all conforming loans will require some form of mortgage insurance, but this may not be the case with a jumbo loan. Depending on the lender, you may actually be able to secure a loan with no required insurance, especially if you are able to bring a down payment of 20% or higher. Mortgage insurance is usually about $30 to $70 a month, but with jumbo loans it can go even higher. For this reason, avoiding the payments can be extremely beneficial.

10. Paperwork Can Get Thick

Lenders will be as meticulous as possible when it comes to writing a jumbo loan. This means that paperwork will be extensive, and you’ll have to provide a wide range of documents to verify your income, savings, assets, and other information. For example, self-employed professionals will need to provide two years or more of tax-return information; if they were going for a conventional loan, they’d only need to bring one year.

11. There Are Alternatives to Jumbo Loans

If you need a loan beyond the amounts allowed by the FHA or other government programs, jumbo loans are a great choice, but they’re not the only option. Piggyback loans, for example, are a combination of smaller loans that allow you to reach the required total for your home. These usually consist of an initial loan worth about 80% of the purchase, with one or two loans to fill in the rest. To get approved for these, many of the same requirements are needed, including a high credit score, although you may get by with a credit score in the low 600’s, which likely would not be enough for a jumbo loan.

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Whether you need help with an FHA loan or a jumbo loan, let us help you get the affordable mortgage you deserve.