What Are Jumbo Loans?
Mortgage loans above the conforming loan limits set by Fannie Mae and Freddie Mac are called jumbo loans. They are also known as non-conforming loans. The conventional loan limit in most counties in eastern Massachusetts for a single-family home is $523,250, so if a borrower wants to purchase a home priced above this amount, they must apply for a jumbo loan. Jumbo loans also allow buyers to purchase luxury homes—those priced at $1 million or above, as well as second homes and personal investment properties.
Since these loans don’t conform to the limits, they can’t be sold to Fannie Mae or Freddie Mac, which means the bank takes on the risk for the loans. From 2008 to 2011 banks were reluctant to offer jumbo loans because they didn’t want to take the risk involved after the housing crisis. Now that the housing market is stabilizing, banks are offering jumbo loans again.
Currently the interest rates for jumbo loans are very low. Jumbo loan rates are now just a quarter or half point above conforming mortgage rates. This is one reason sales of luxury homes in Massachusetts are at their highest level since 2005.
What Are the Requirements for a Jumbo Loan?
Jumbo mortgages often require a higher down payment of 20% or more for their loans. You typically need a 20% to 25% down payment on private jumbo loans, and mortgages over $1 million can require up to 30% for a down payment.
In 2015 additional programs with 5 to 10% down for Jumbo Mortgages for those with exceptional credit began to be offered.
In order to qualify for a jumbo mortgage, you have to have a low debt-to-income ratio (DTI) that allows you to comfortably to pay the principal, interest, taxes and insurance each month. The DTI compares your monthly debt obligations to your pre-tax income. As a rule, the monthly mortgage payment on a jumbo loan should not exceed 43% of your pre-tax income. You will also need to present proof of income and document two years of income history when applying for a jumbo loan.
Lenders will want to see that you have enough money saved to cover housing expenses in case of an emergency. They will typically require 6 to 9 months of cash available to cover the monthly principal, interest, taxes, and insurance payment, also known as PITI reserves.
A good credit score is also needed to qualify for a jumbo mortgage. Required scores vary according to lender, but you should expect to have a score of at least 700.
2016 loan limits for Massachusetts and New Hampshire:
As of January 1, 2016 most Eastern Massachusetts counties raised their loan limit to $523,250 while other counties like Worcester are $417,000. Most Southern New Hampshire counties are also $417,000. For more information on loan limits, click here.
Where Can You Get a Jumbo Loan?
You can apply for a Jumbo Loan with any mortgage lender that offers them.
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