There are certain things that are quintessentially American: big cars, big buildings, big movie stars, bigger hamburgers, and…big mortgage loans? In fact, jumbo loans – or any loan above conventional loan limits as set by government-sponsored Fannie Mae and Freddie Mac – are back in a big way. Despite having gone through some volatility during the mortgage and real estate crisis starting in 2008, jumbo loans are again an invaluable financial tool for high-end homeowners.
The good news is that banks and lenders are once again opening up their doors to lend big bucks for a qualified homebuyer to make an upper echelon real estate purchase. The fact that banks, lenders, and even government-backed loans once again favor jumbo loans, considering them within an acceptable risk tolerance, is a significant change from the box tightening that occurred during the recession, and made them all-but effectively go away, with unrealistic parameters and higher rates.
But with appreciation rates up, defaults way down, and consumer confidence in the real estate sector soaring once again, jumbo loans are not only back in play, they’re extremely favorable.
For those who need a refresher, jumbo loans are defined by larger mortgage amounts than is standard for government-backed loans like Fannie Mae and Freddie Mac. Jumbo loans are defined as loans exceeding 7,000 in most areas, or higher than 5,000 in high-cost markets (like New York, San Francisco, and others).
While the jumbo loan approval process is largely the same as with any loan, there are a few things to keep in mind when you undertake bank approval. Whether refinancing your current large-value home or buying that million-dollar dream home with a jumbo loan, here are 7 tips:
- A great credit score is even more important.
With conventional loans, a 680 credit score is considered good, and definitely adequate to qualify for a conventional loan. But with jumbo loans, credit score is even more important, and interest rates go down accordingly. The Wall Street Journal recently reported that borrowers with credit scores of at least 760 got the best possible interest rates when taking out jumbo loans. So if your credit score is sub-760, make sure to start looking at your credit report and repairing what needs it (perhaps with the aid of a professional) well in advance of the day you need the loan.
- Consider a buy-down.
When dealing with a higher loan amount, it becomes more important to look at the financial impact of a rate buy-down. The difference of a few extra dollars in the beginning could save you exponentially larger sums in the form of lower interest payments and a quicker payoff as you go.
- Look at the two-loan option.
If you are reasonably close to the $417,000 conforming loan limit, think about getting two loans if possible to constitute your mortgage amount – not just one. While this may be more difficult than when home equity and second loans were widely popular during the pre-meltdown real estate boom, it still may be possible to get a first loan at $417,000 or less and then a small second-position loan to fill in the rest.
- Is an ARM right for you?
Shorter-term Adjustable Rate Mortgage (ARM) loans may be perfect for those who are planning to sell or pay off their homes in a few years and want the savings now, but there could also be a greater risk with jumbo loans in case the house doesn’t appreciate in value. In the end, if you know you’ll be selling or have plenty of equity for a future refinance, a 10-year ARM may even be available and a great option for your jumbo mortgage.
- More money down can help.
With most conventional loans on owner occupied properties, 20% equity is considered the gateway to the best standard category of interest rates and lending standards. But with jumbo loans, putting 30% down or having 30% equity opens a lot more doors, resulting in better rates. So whether a down payment on a purchase or the optimal equity you need for a great refinance, 30 is the magic number – not 20.
- Get ready to provide documentation.
You’ll be expected to provide standard documentation just like any loan process, but with jumbo loans, there may be more demands. Banks just want to do an extra level of scrutiny with high-dollar loans and borrowers who can afford high-end real estate often have a far complex (and enriched!) financial picture. So corporate documents and tax formation documents if you own a business, asset sheets, trust information, and other financial documents may be necessary. Be organized and prepared from the beginning and it will help you from getting frustrated, and ensure your loan gets approved efficiently.
- Think long-term and exit strategy.
Likewise, it’s important to think long term and consider your exit strategy when taking out a jumbo loan and/or buying into the high-end real estate market. Will this be your home for the rest of your life? Is it possible you might need to relocate for a job or lifestyle changes down the road? Or are you looking to refinance in a few years or even sell to capitalize on any appreciation? Market fluctuations tend to hit luxury homes harder in most markets where the average price is much lower. So whatever mortgage strategy you employ and loan you choose, remember that there may be less lending options down cycles as well as larger equity drops.
- Go with mortgage broker that can find the best deal for you.
Instead of walking into a bank, use a mortgage broker like Guild Mortgage when looking for a jumbo loan. Mortgage brokers can effectively “shop around” with multiple banks, lenders, and financial institutions – ultimately making sure you get the best rate, terms, and deal available.
There are even some special loan programs for people in certain professions and specialized jumbo lenders. Contact us and we’d be happy to give you more information and get started finding you the best jumbo loan that’s right for your needs.