Home values have been rising at their fastest pace since before the housing bubble. This is fantastic news for homeowners that have been waiting to recapture the equity they lost. In several areas throughout the country the increased home values have also created bidding wars as people quickly put in offers. In places like California, rising home prices also create a need for Jumbo Loans. A Jumbo Loan is a loan amount over the conforming loan limit of $417,500. If you are using a VA loan that limit is increased for several areas throughout the country.
Jumbo Loans have traditionally been more difficult to secure as they represent an increased risk to a lender. The more money they lend, the more money they can lose in the event of a default. Jumbo Mortgage Loans are available for borrowers with a solid credit rating.
Differences Between Traditional and Jumbo Mortgage Loans
• Down payment – A Jumbo Mortgage Loan requires a higher down payment. Loan amounts that are over the conforming loan limit but under $1 million will typically require a 20 – 25% down payment. Mortgage loans over $1 million will typically require a 30% down payment or higher.
• Location – When a lender reviews an application for a Jumbo Mortgage Loan they will analyze the location of the property very carefully. They are looking to make sure that the home is not overpriced for the area. For example if your dream home is valued at $1.5 million but the closest comparable is valued at $450,000 that is a major concern. However if you are purchasing a home for $1.5 million in a neighborhood with similar houses, the risk to the lender is reduced. A lender needs to feel confident that if they had to foreclose on the property they would be able to sell it without too deep of a discount.
• Reserves – A mortgage lender will require reserves in the bank to cover future mortgage payments. Each lender has a different requirement but the range can be anywhere from three months to a year. The reserve requirement is in place to ensure that if something happened to the borrowers source of income they could use savings to pay the mortgage while they recovered.
• Credit – Credit score requirements are higher on Jumbo Loans. They typically require a minimum of 680 with most lenders wanting a 720 or higher. Borrowers will have the best success securing a Jumbo Home Loan if they improve their credit first.
To find out if you qualify for a new home loan contact your mortgage banker. They will take down your income and asset information and check your credit score. A quick analysis will indicate the dollar amount you qualify for and whether it is in the conforming or jumbo range. Interest rates change based on your loan amount and down payment so compare the rates to determine how much you are willing to spend. The good news is that jumbo home loans have reasonable interest rates. You can purchase your dream home but do it quickly, before home values and interest rates rise further.