Mortgage consumers looking for more money on a home loan may want to consider a jumbo loan.
A jumbo loan, otherwise known as a non-conforming loan, is a mortgage loan of $484,350 or more for a single unit residence for 2019.
The reason jumbo loans are known as non-conforming loans is that the larger amount of the loan surpasses the limits of most conventional mortgage loans, especially those guidelines from Fannie Mae and Freddie Mac, which purchase conventional mortgage loans to stabilize the U.S. mortgage market. Fannie (FNMA) and Freddie (FMCC) set the conventional mortgage loan limit of $484,350 for 2019 (up from $53,100 in 2018.)
By and large, though, homebuyers steer toward jumbo loans if they plan on getting a mortgage for more than $484,350, depending on the city or state where you reside (the number can go higher based on the market you're buying into.) If you're buying a home in an expensive area of the U.S., like Hawaii, San Francisco or New York City, the size of the jumbo loan should rise exponentially - often north of $700,000.
Jumbo loan borrowers need to do their homework and thoroughly vet any property to ensure it qualifies for a jumbo loan. That's not as easy as it sounds - not when lenders may not agree to a jumbo loan for a second home or for a foreclosed or short-sale home.
It's up to the buyer to know going in what type of property he or she is buying, and whether it fits the criteria for a jumbo loan.
The good news? Your loan provider can help you identify your mortgage loan and whether or not it qualifies as a jumbo mortgage loan.
Jumbo Loans vs. Conventional Loans
Jumbo loans share many similarities with conventional mortgages.
For example, you'll need a good credit score to qualify for both a conventional mortgage loan and a jumbo mortgage loan.
Some lenders may require you to have a higher credit score for a jumbo loan compared to a conventional mortgage loan. By and large, homebuyers seeking a jumbo loan can expect to have their credit score checked by a lender (A FICO (FICO - Get Report) score of 680 or higher should get the job done), have to provide a suitable down payment for the property, and have their household debt-to-income ratio evaluated by a mortgage lender.
Jumbo loans are deemed as a "non-conforming" mortgage loan (compared to "conforming" mortgage loans) for conventional mortgages, and thus are generally tougher to obtain.
Where jumbo loans also vary from conventional loans is after the mortgage loan closes. There, jumbo loan reserves (also known as post-closing liquidity) need to be set aside by the homebuyer, usually equal to up to 12 months of home payments (the higher the borrower's credit score and the higher the down payment, the lower the cash reserve the borrower needs to set aside.)
In some cases, the closing reserve may be waived if the home loan borrower can demonstrate a low household debt-to-income ratio or if your home down payment is exceptionally high.
Pros and Cons of a Jumbo Mortgage
Like any mortgage product, jumbo loans have their upsides and downsides - here's a closer look:
Pros of a Jumbo Mortgage
More Money. The number one benefit of a jumbo loan is the opportunity to get more loan money to purchase a high-quality property.
Low down payments. Unlike many conventional mortgages, jumbo mortgage loans come with low down payments. While conventional mortgage loans usually require a 20% down payment, jumbo loan down payments can be as low as 5%, with 10% a more common figure.
Jumbos come with competitive interest rates. Interest rates for jumbo loans have declined in recent years, and in 2019, are even slightly lower than a borrower will find with a conventional mortgage loan.
Ample flexibility. Jumbo loans come in different varieties, thus giving borrowers more leeway to choosing the mortgage that works best for them. Borrowers can get a 30-year fixed rate jumbo loan or opt for an adjustable rate mortgage instead. Borrowers love flexibility and they get just that with jumbo loans.
Cons of a Jumbo Mortgage
You'll need a solid credit score. If your FICO credit score stands at 660 or lower, you'll have trouble landing a jumbo mortgage loan. If you can put down a larger down payment, however, you may still be able to obtain a jumbo mortgage.
You'll need to demonstrate a high annual income. Lenders tend to get selective with jumbo loans and will want you to provide proof that you have a solid annual income and have substantial personal financial assets.
You'll need to put cash away on reserve. When you close on your jumbo mortgage loan, you may be asked to put away up to 12 months of mortgage payments aside to get the loan. Lenders ask for a cash reserve in the event the borrower lands in financial trouble.
Landing a Jumbo Mortgage Loan
In many ways, getting a jumbo mortgage is more difficult than landing a conventional mortgage loan, most notably because the loan amount is larger and the lending standards more stringent.
Still, getting a jumbo loan is highly doable if you're both disciplined and creative. Start with these tips.
1. Check with multiple lenders and get multiple interest rate offers.
Since jumbo loans are larger than conventional mortgage loans, any money you can save on rates is a big deal.
For example, just a half a point difference in interest rates for a $700,000 jumbo loan at 4.375% versus 4.875% can save you about $75,000 over the course of a 30-year loan.
2. Check your credit score, and boost it where you can.
You'll need a robust credit score to get a jumbo loan - preferably a FICO score of 680 and up (but the higher the better.) Before you apply for a jumbo loan, check your credit score free at annualcreditreport.com. Scan and check for any errors and report any discrepancies to the major credit reporting bureau that has listed the information - either Experian (EXPGY) , Equifax (EFX - Get Report) or Transunion (TRU - Get Report) .
3. Get your personal financial documents in order.
Typically, lenders will want to see your most recent tax returns, proof of employment and possibly 90 days or so of bank statements. Mortgage lenders will also prioritize your household debt-to-income ratio to make sure you're not stretched out financially after taking out a jumbo loan.
In general, the lower your DTI, the better. Many lenders will cap a borrower's debt-to-income ratio at 45%.
4. Be prepared to demonstrate a cash reserve.
Your chances of getting approved for a jumbo mortgage loan will increase significantly if you can prove you've put away up to 12 month's worth of mortgage payments in a cash reserve. A simple bank savings account should get the job done - just make sure to bring proof of the account when you're applying for a jumbo loan.
5. Have your target home appraised.
Lenders may also require you to have the home you're buying appraised by a professional home appraiser to determine the current value of a property (by someone other than the seller.)
Where to Get a Jumbo Loan
Mortgage loan borrowers can find jumbo loans at most major banks and mortgage lenders, like Bank of America (MER-K) , Citizens Bank (CFG - Get Report) , U.S. Bank (USB - Get Report) , Quicken Loans and Lending Tree (TREE - Get Report) .
By and large, you won't likely find jumbo loans at smaller banks and credit unions, unless you live in an area where home prices are high and jumbo loans are in big demand. Plus, larger financial institutions will likely offer better interest rates, just to get your business.
A good place to start searching for a jumbo loan is your own bank - they know you and are more likely to approve for a loan than a bank or lender that doesn't have a relationship with you.
If your financial institution doesn't offer jumbo loans, they'll likely point you to one that does.
It's never too late - or too early - to plan and invest for the retirement you deserve. Get more information and a free trial subscription to TheStreet's Retirement Daily to learn more about saving for and living in retirement. Got questions about money, retirement and/or investments? We've got answers.