Jumbo loans are any loans that are higher than the allowable limit set by the Fannie Mae and Freddie Mac, which use the FHFA as their guide.
Essentially, if you need to borrow a significant amount (more on specific amounts below), you will need to use a jumbo loan. Because of the nature of these loans, they have different qualification processes and different approval requirements.
This has, unfortunately, led to some false jumbo loans myths; myths that keep some people from using this helpful form of financing. If you are considering a high-cost purchase, you deserve to completely understand jumbo loans. In many cases, this starts with busting the top jumbo loan myths…
Top 5 Jumbo Loan Myths
Myth #1: The Interest Rates are Always High
It’s commonly assumed that because jumbo loans involve a higher amount, they will always have larger interest rates than conventional loans. This assumption, however, is false. Yes, it is true that many jumbo loans have higher interest rates, especially if the borrower does not have an excellent credit score, but there are cases when the rate on a jumbo loan can be as low as, or lower than, conventional loans.
As we outlined in our blog article “Busting The Myth On Jumbo Loan Interest Rates,” there are many reasons that rates can be lower on jumbo loans. However, one of the primary reasons is market competition. Lenders stand to earn a lot of total money off the interest on jumbo loans, so they are competing for business. One of the aspects they use to attract borrowers is lower interest rates.
Myth #2: A Massive Down Payment is Always Required
When you take out a jumbo loan, even a small percentage of the total purchase price represents a large amount of money. For example, if you are purchasing a property worth $2 million, a 5% down payment is $100,000. However, many people assume that to take out a jumbo loan, you will need as much as 30% down. This is simply not the case, as certain jumbo loans can be acquired with 10% down or even 5% down, depending on the lender and your situation.
To qualify for a jumbo loan with a low down payment, you need to have solid credit, and you may be required to prove significant cash reserves. You will also need a low debt-to-income ratio. Basically, if you want to use a lower down payment, which will increase your available capital, you’ll need to demonstrate that you are in strong financial standing and can take on more debt without significant risk.
Myth #3: They are Only Available to Borrowers with Excellent Credit
Again, people assume that you can only take out a jumbo loan if you have credit above and beyond the typical scores. Once again, this is simply not the case. The common jumbo loan myth is that to use a jumbo loan, you have to have a credit score of 700 greater. 700 is certainly a strong score, but this requirement would eliminate a lot of potential borrowers from the option. There are actually programs available that allow you to use jumbo loans with a credit score below 700.
Jumbo loans, because of the sheer amount being loaned, represent greater risk to lenders. Therefore, higher credit scores may be required to offset the risk. To get a jumbo loan with a lower credit score, you’ll have to reduce risk through other means, such as a large down payment or low debt-to-income ratio.
Myth #4: They are Only Used to Buy Extravagant Mansions and Estates
As the myth goes, jumbo loans are only used to purchase large mansions and extravagant homes for the super rich. Once again this is decidedly false. A “jumbo loan” is anything that is above and beyond the allowable rate by Fannie Mae and Freddie Mac, both of which use the limits set by the Federal Housing Finance Agency (FHFA). The FHFA sets limits on a county-by-county basis, but the lowest limit across the country is $484,350, which is the limit applied to most of the nation. In high-priced markets, the limit is increased. San Diego County, for example, has an FHFA limit of $690,000. Los Angeles and Orange counties have limits of $726,525.
That sounds like a lot, but when you look at the asking prices for houses in San Diego, for example, you see that a conventional loan may not be enough.
Looking at Realtor.com’s listings for San Diego county, you see 4,687 homes listed at an asking price of $700,000 or less, which generally should, when accounting for down payments, allow for the purchase with a conventional loan. However, when you look at homes above $700,000, you find 3,187 listings, and when you shuffle through the listings, you see that not all of them are opulent mansions. Yes, they are nice homes, but many are obviously not the stellar estates made strictly for the extremely wealthy.
(Note: Listing numbers from Realtor.com current as of January 2nd, 2019. Listing change frequently and numbers are likely different.)
Myth #5: They are Limited in Flexibility
People also assume that jumbo loans have almost no flexibility in terms. They think that the loans are only typical 30-year fixed-rate mortgages, and that little else can be adjusted to fit the borrower. The truth is that these loans can be molded to fit the specific needs of virtually any borrower. They can be 15, 30, or even 40-year terms, and they can come with either fixed or adjustable rates. They can also be used for the purchase of a primary home, a vacation home, or an investment property; either commercial or residential.
Frankly, these loans can be crafted to fit virtually any need, and an experienced lender can work through the qualification process to get the right terms to suit any borrower.
Providing Expert Guidance Through Jumbo Loan Myths
Contact our staff today and we’ll help you get the right jumbo loan for your needs. With a dedication to common-sense underwriting, we can increase your chances of mortgage approval.
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I really enjoyed working with Chad Baker and the rest of the team. This was our first time buying a home in California and we started with unnecessary assumptions based on our previous experience as home-owners in a different state. Chad and his team were available throughout the whole process, explaining the state differences, answering all our phone calls and emails quickly and directly, and providing detailed weekly status reports so that all parties including agents knew exactly where we were in the process. Chad was very experienced and provided customized loan products for us to consider, which definitely facilitated our transaction. I recommend the Chad Baker team! ”