Real estate investors and those seeking to enter the market may, sooner or later, have a scenario in which a “jumbo loan” is part. That is, if they need more financing than what the federal government allows. But what does the loan entail? Here is, breaking down jumbo loans: how they work and who they benefit.
Also called a jumbo mortgage or non-conforming conventional mortgage, a jumbo loan is a type of financing that exceeds limits established by the Federal Housing Finance Agency (FHFA).
In other words, a jumbo loan is used to finance real estate – usually luxury — that costs too much for a conventional conforming loan. Properties that cost more than the conforming loan cap require a jumbo loan.
Such a loan, unlike conventional mortgages, is ineligible for purchase or guarantee, and may not be securitized by Freddie Mac or Freddie Mac. This kind of loan also has special underwriting requisites and IRS implications.
While jumbos are non-conforming mortgages, they still must follow Consumer Financial Protection Bureau guidelines regarding what is deemed a qualified mortgage.
There are key elements involved in jumbo loans and the process for taking them out, including:
As with most anything else in the investment space, there are advantages and considerations when it comes to jumbo loans, including:
The primary difference between a jumbo loan and a conforming loan is the loan size. Generally, low down payments are relatively common with conforming loans. By contrast, jumbo loans usually require a minimum down payment of 20%. Some lenders will go as low as 10%.
Also, depending on the lender and one’s financial situation, the mortgage rates for jumbo loans may be somewhat higher than those on conventional loans. Note, though, that some lenders can offer rates that are competitive with those of conforming loans. So, it is best to shop around.
Regarding down payments, in previous years, jumbo loan mortgage lenders frequently required a down payment of 30% of the property’s purchase price. That’s compared to 20% for conventional mortgages. These days, that amount is down to 10-15%.
There are various types of jumbo loans, including fixed- and adjustable-rate mortgages. With the former, the amount that is paid toward the mortgage itself, the amount that comprises principal and interest, will not change.
With adjustable-rate mortgages, one can lock in a low interest rate for the loan’s first 5-7 years, after which the rate is periodically adjusted.
Then there is an interest-only jumbo loan, which permits the borrower to make interest-only payments for the first decade. Subsequently, the loan amortizes into a standard fixed mortgage of 20 to 30 years.
Also, those who are a bit over the conventional loan limit may opt for what is called a combination jumbo loan. Such a loan can permit the borrower to purchase a bigger property without having to meet the tighter jumbo loan requirements.
A jumbo loan is not for everyone, and just because one can likely qualify for one does not necessarily mean they should take such a loan out. Before going the jumbo loan route, consider:
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A jumbo loan can truly come in handy if one has a luxury property in mind and needs a higher level of financing than what is conventionally available. However, eligibility requirements for jumbos are more stringent, and there are considerations such as heightened borrowing costs.
Remember that there are other ways to invest in real estate, while diversifying holdings in the process, that do not involve taking out such a loan.
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