If you're into buying a bigger home or refinancing to pull out lump sum cash, then jumbo mortgages may be just what you need.
Until the changes made to the Freddie Mac and Fannie Mae guidelines in 2008, a mortgage exceeding $417,000 on single family home was known as Jumbo loan or Non-conforming. But as per the
Economic Stimulus Bill signed February 13, 2008, the conforming loan limit has been extended to $729,750 for high cost areas only till the end of 2008.
Investors like Freddie Mac and Fannie Mae will therefore purchase loans (originated between July 1, 2007 and December 31, 2008) up to $729,750 till December 31, 2008. However, the limits are even higher in Alaska, Hawaii, and other areas depending upon the government estimates of home prices in such areas.
How do I qualify for Jumbo Loans?
Check out
3 factors prior to going for a bigger loan:
- Your credit standing
A FICO score of 680 is the minimum you should have, though most lenders look out for scores above 700 for jumbo loans. If you don't have such a score, better wait till it improves or else you may not get a good rate and end up in mortgage problems. Here are a few credit tips to help you qualify:
- Pay down revolving debt, if any and try to improve your score by 5-12 points within 3 months if your score is somewhat close to 680-700.
- Try to reduce the balance by 50% on credit cards which you've maxed out.
- Avoid opening new lines of credit.
- Close unused credit cards which you've been handling since a long time.
- Resolve medical collections and late payment issues or else these can hurt your score.
For additional credit tips, refer to the credit repair section. The purpose is to have a clean credit report before you apply for the loan.
- How much to put down
The down payment depends upon where you're buying the property. Most markets would require you to put down 20% of the purchase price especially in markets where home prices are on a decline. For other areas, a 5% down payment can be accepted. Usually no down payment options are unavailable as jumbo loans.
- Your assets and liability
You may qualify for a bigger loan but its better not to go for a loan amount higher than you can afford. So, make a list of your assets and liabilities and check out How much you can afford. Apart from your assets, what matters is, how many accounts you have at the bank and how many you are likely to open for business purpose or personal considerations.
How's the interest rate?
Usually jumbo loans are available at 1-2% higher rate than that of conforming loans. The higher your jumbo loan amount, the higher is the rate offered. Other factors affecting the borrower's rate are his financial situation, creditworthiness and debt-to-income ratio.
The higher rates for bigger loans account for the greater risk involved. That's because once a borrower defaults, he'll not find it easy selling his home and paying off the loan. Neither will the lender be able to sell off through foreclosure or deed-in-lieu and recover the proceeds. The reason is, there's only a small market for homes secured by jumbo loans; hence this translates into higher interest rates charged by lenders.
How can I make jumbo loans more affordable for me?
Here are
3 tips to help you structure the loan such that
you can afford it.
- Conforming and second mortgages:
Lenders often provide jumbo loans as a combination of 2 loans –conforming loan and second mortgage. The first being a conforming loan, will fetch you a lower rate than the jumbo. The second, usually a Heloc, will have higher rate; the lesser the second loan amount, the lower will be the blended or effective rate of the two mortgages.
To find out whether you should take out jumbo loan or a combination of conforming and second mortgage, you need to determine monthly payment on both the offers and as well as the total interest paid for each. Then compare the costs including total interest paid on each of the loans and then take the final decision.
However, if you have higher income, you may even think of paying off the second faster using your bonus.
- Bigger down payment:
If you have a good credit history (with a score of around 720) and can put down more than 20%, you have a fair chance of getting a lower rate on a conventional jumbo loan. For FHA loans, off-course the down payment is far lower.
- Pay points for a low rate:
If you're staying in the house for more than 4-5 years, it's worth paying points to lower the rate on your jumbo loan.
If you have good credit and your income is high enough, you'll be better off with a jumbo loan. But be prepared for the strict underwriting requirements, often more than one appraisal, detailed inquiry about your finances, income and debt and other factors which affect your ability to pay off the bigger loan.
adonis
