Identifying the type of mortgage that suits your needs and financial capacity is the key to successfully shopping for a home. If you happen to stumble upon a diamond in the rough of the real estate housing market, you may need to jump the big guns and take on a high-value mortgage called jumbo loans.
What is a Jumbo Loan?
Also known as a non-conforming conventional mortgage, a jumbo loan is a form of mortgage that helps finance single-family or luxury homes in a fiercely competitive real estate market. These are designed to provide for loans that exceed the maximum loan limits set by the Federal Finance Housing Agency (FHFA), which typically falls at $726,000 for multiple Los Angeles.
The Risks of a Jumbo Loan
Jumbo loans are the option for high-income investors who want to finance properties with prices that go beyond the conventional conforming loan, meaning that it is too expensive. However, it is a risky business for lenders because a jumbo loan is not guaranteed by Fannie and Freddie, which leaves the lender vulnerable to costly consequences if a borrower defaults.
Keep in mind that you can avail of a jumbo loan either as a fixed interest rate or an adjustable rate, both of which offer unique terms.
Qualifying for a Jumbo Loan
Even if you have a gold mine sitting in your bank account, qualifying for a jumbo loan won’t be as breezy as you think. There are plenty of qualifications you need to jump through, such as the following:
1. Credit Score
Seeing as a jumbo loan has high stakes, it’s no surprise how lenders will require you to have a FICO score higher than 700 or 720 to pass for a jumbo loan.
2. Debt-to-Income Ratio
Lenders often require a hard cap of 45 percent debt-to-income, though most will consider the DTI ratio to minimize the risk of over-leveraging. Some lenders are flexible and may accept your ratio so long as you have a reliable cash reserve.
3. Cash Reserves
If you have ample cash in the bank, you have higher chances of qualifying for a jumbo loan as lenders prefer those with cash reserves that can pay for at least a full year of mortgage payments.
You need to complete extensive documentation when qualifying for a loan, including your tax returns, W-2s, 1099s, bank statements, and any details regarding investment accounts. This is because the lender will need a clear overview of your financial health before entrusting you with a jumbo loan.
The Bottom Line
If you’re planning to buy or invest in a massive piece of property without piggybacking on other loans, qualifying for a jumbo loan is your best bet as it offers the right mortgage and financial coverage for such a high-scale investment.
With that in mind, it is not something you can decide on a whim as it involves massive amounts of money. You must be confident that you can keep up with mortgage payments before even considering applying for a jumbo loan.