The decision to take out a jumbo loan is a big one. Higher loan amounts come with higher monthly payments to manage. In light of that, we decided to lay three questions aimed at helping you decide whether or not a getting a jumbo loan is right for you. Ask yourself these questions to see if you’re prepared to take the leap.
Do I actually need a jumbo loan?
Here’s the secret about jumbo loans that many buyers don’t realize: they’re not meant to help buyers stretch the limits of how much they can borrow. They’re meant to help financially secure buyers invest in homes that are more expensive than average. Whether or not you need a jumbo loan will be determined by the price range in which you are looking to buy and the conforming loan limit in your area.
Each year, Fannie Mae and Freddie Mac set limits on the size of loans that they will purchase or guarantee. Loans that fall within these limits are known as “conforming loans” and loans that fall outside of these limits are known as “non-conforming loans” or “jumbo loans”. In 2019, the standard conforming loan limit is $484,350. However, in certain high-cost areas like Alaska and Hawaii, that limit is raised to $726,525.
The first step in determining whether or not you need a jumbo loan is to look up the conforming loan limits in your area. Then, think about how much you’re prepared to spend on your new home. If your anticipated price range falls outside of your area’s conforming loan limit, you’ll likely be a candidate for a jumbo loan.
Am I prepared to meet stricter qualifying requirements?
Since jumbo loans are not guaranteed by Fannie Mae and Freddie Mac, they’re seen as riskier in the eyes of lenders. No guarantee means that the lender will lose out if you default on the loan. This added risk means that lenders typically have stricter qualifying requirements on jumbo loans. If you’re considering getting this type of loan, you need to be prepared to meet them. They are as follows:
You need good credit to be approved for a mortgage. While loans backed by the Federal Housing Administration will accept scores as low as 500 and conforming conventional loans tend to start at 62o, jumbo loans require a minimum of a 680 score. Though it’s not uncommon to see FICO score requirements in the 700’s for some jumbo loan programs.
Lenders use your debt-to-income ratio to verify your ability to pay back the loan. It’s the sum of all your monthly debts divided by your gross monthly income. When a loan is guaranteed by Fannie Mae and Freddie Mac, you’re allowed to have a debt-to-income ratio of up to 50%. However, where jumbo loans are concerned, that number typically decreases to 43%.
Your loan-to-value ratio is the amount you borrow on your home compared to how much your home is worth or the percentage of your home’s value that’s being mortgaged after you make your down payment. With government-backed loans, you can often mortgage up to 97% of the home’s value. With jumbo loans, however, that number is much lower. While there may be some exceptions, you can typically expect to see a maximum loan-to-value ratio of 85%, meaning that you should be prepared to make at least a 15% down payment.
Does this payment work in my budget?
No matter what kind of loan you’re looking into getting, you need to know what your monthly payment will look like. However, this step is even more crucial for those considering jumbo loans. After all, a plus-sized loan amount means bigger monthly payments. Before you do anything else, make sure those payments work in your budget.
To find the right loan amount for you, start by using a mortgage calculator to get a sense of what your monthly payment will be at various sale prices. Then, when you’ve found a price at which you feel comfortable, work that number into your monthly budget to see how it feels when combined with your other expenses. Then, when you find a number that works all around, stick to it, even if it means compromising on your loan amount.