In certain areas of the country, the cost of single family home is absurdly high; so high, in fact, the only way to finance a home is to get a jumbo loan. These are similar to regular conventional loans, except they exceed the maximum value Fannie Mae and Freddie Mac set for loans that conform to their guidelines. While opting for a jumbo loan can help you get the home of your dreams, here are two things you need to be aware of before you sign on the dotted line.
The Interest Rate Is Typically Higher
As odd as it may sound, the interest rate for jumbo loans tend to be higher than those for conventional mortgages, and the primary reason for this is because jumbo loans pose a bigger risk for lenders. First, because they exceed the limits set by Fannie Mae and Freddie Mac, these agencies will not buy them from lenders, which can negatively impact the bank's cash flow and make it harder to finance other mortgages.
Second, everything about a jumbo loan is bigger, including the monthly payments, taxes, and other financial concerns. Therefore, the risk of default is higher. With these loans, the bank hopes to make enough money upfront via interest to cover its costs before the homeowner gets into a situation where they can't make payments anymore. This is also why most banks that cover jumbo loans only offer variable rates for them.
If you opt for a jumbo loan, it's important you shop around for the lowest interest rate possible and that you're clear on when the rate will increase so you can prepare your finances.
The Qualification Requirements Are More Stringent
Because of the higher risk involved with jumbo loans, banks tend to be must more strict when it comes to qualifying for them. While it may be possible to get a conventional loan with a score as low as 600, the minimum score for a jumbo loan is 680 and sometimes higher depending on the lender.
Additionally, many lenders will typically insist you put down at least 20 percent and sometimes more to secure the loan; though there are a few that will accept a minimum of 10 percent. Your cash flow and debt-to-income ratio will also be scrutinized to ensure you can afford to make the payments.
If you suspect you may need to get a jumbo loan to purchase a home in the area you want to live, it's important to take a look at your credit and income and start making improvements as soon as possible. Having a higher credit score and more money coming through may also help you qualify for a better interest rate.
For more information about buying high-value homes or help locating one that fits your needs, contact a real estate agent.