Things To Know Before Applying For Jumbo Loans
Jumbo loans are extremely large loans, typically exceeding $417,000. They are very common in states such as California and New York where pricey real estate is the norm. They tend to be for larger single-family homes, although people also use them to buy condominiums. Many lenders designate them only for primary homes, but other lenders allow them for investment properties, second homes or vacation homes. If you’re thinking about applying for a jumbo loan, there are a few things to know first.
Reasons to Take Out a Jumbo Loan
- Many people who live in areas such as Irvine, California, have no choice but to go jumbo. Otherwise, they’d probably have to use up all of their savings to purchase a home.
- You can avoid multiple loans in favor of one large loan. One monthly payment, one lender, far fewer headaches.
- You’re comfortable with the risk that goes along with adjustable-rate loans; fixed rates don’t happen often with jumbo mortgages. You can also refinance a jumbo loan to get lower interest rates.
- They’re good for tax deductions; you can deduct the interest on loans up to $1 million.
- In some cases, it’s possible to qualify for a $1 million-plus jumbo mortgage with as little as 10 percent down, especially if your debt-to-income ratio is low. The tradeoff is a higher interest rate.
- Some lenders offer reamortization, meaning that as you pay down your loan, your monthly payments get recalculated. It’s an incentive to use bonus income toward your loan.
Reasons not to take out a jumbo loan
- Payments are hefty due to high interest rates and the added risk. Jumbo loans don’t carry private mortgage insurance, which otherwise gives lenders security. Ideally, your monthly debts would not exceed 38 percent of your pretax income, although some lenders push the debt-to-income ratio to as high as 43 percent. If your debt is higher than that, some lenders will still work with you.
- Qualifying for jumbo loans is harder than for traditional loans. You must document a good credit score, usually no lower than 700, sufficient income, liquidity and plenty of assets. Often, you need to put down at least 20 percent of the purchase price for your down payment, or if you’re refinancing, to have at least 20 percent equity in the home.
- The risk involved is significant. If the value of your property falls, you stand to take a hit in equity. Refinancing becomes harder, and if you sell your property, you might do so at a loss.
Documenting Income and Assets
You’ll need to prove ability to repay the loans. If you’re self-employed, lenders typically ask to see the past two years’ worth of tax returns and your two most recent bank statements. However, lenders do offer some flexibility. For instance, say you’ve worked in a certain field for 20 years and a year ago, you opened a business in that field. Instead of requiring two years of self-employment tax statements, a lender might be okay with only one year of returns as long as you show stability and growth for the business. In most cases, you’ll have to show sufficient liquidity equaling at least six months to a year’s worth of monthly payments.
If you hold down a traditional job, a lender wants to see your pay stubs from at least the past 30 days and your W2s for the past two years.
As you see, jumbo loans require careful consideration. Before you apply, make sure your income and debts are in the right place and that you understand the risks.