Jumbo loans are often helpful for you to purchase high-end properties. However, if you don’t have an adequate idea about it and the risks associated with it, you might find yourself in danger. So, before deciding to take a jumbo loan or jumbo a, know more about it.
That’s why we’ve created an article containing some basic information about the jumbo loan and related things. This will give you a good understanding of jumbo loans, why it is provided, and how it works. Also, after reading this, you’ll know whether you should go for it or not.
What is a Jumbo Loan in Texas?
A jumbo loan is a conventional mortgage loan that is not government-ensured, exceeds the conforming loan limit, and is provided for purchasing high-end properties. This is typically provided for purchasing properties like luxury houses. So, it has a relation to the median price of houses in the specific area.
As it is not backed by Fannie Mae or Freddie Mac because of exceeding the limit, the risk in offering a jumbo loan is very high. So, the interest rate on this loan is also huge. This has made it tough and risky to claim.
In Texas, $647,200 is the conforming loan limit for all the counties. So, any loan amount larger than this conforming amount is counted as a jumbo loan in Texas.
Requirements of Jumbo Loan?
The jumbo loan comes with some strict requirements that you must fulfill to get the loan. This list of requirements is long because it is not backed by government agencies. Below are the basic conditions for this type of loan.
Having a good credit score is a must for jumbo loans. It is higher compared to the credit score required for regular loans. Having a credit score of around 700 or more is recommended for getting jumbo loans. However, it varies depending on the lender. Some lenders look for more credit scores as they want to stay as risk-free as possible.
The rule of a down payment is also strict in the case of a jumbo loan. It depends on the lender and the amount of the loan. However, credit score also affects down payment.
A typical range of down payment for jumbo loans is around 16%-20%. For this range, the other requirements are stricter. On the other hand, if the down payment is around 20% or more (, maybe there is less restriction on other factors.
The lender wants to be sure that you can repay the loan within time. So, having a cash reserve of a specific amount is mandatory in most cases. The higher the cash reserve is, the more the possibility of receiving the jumbo loan.
You need to show proof of adequate cash reserves for getting the loan. Some lender doesn’t care much about this if you have a good income flow.
Consistency of Income
You need to have a stable income source that offers consistent income for a long time. Without a stable income source, it is almost not possible to get a jumbo loan. A consistent income is proof that you have the capability to pay back the loan within the deadline. So, lenders ask for proof of consistent income when you ask for a jumbo loan.
This ratio expresses your debt as the percentage of your income. To count this ratio, you would have to compare your total expenses and total income for a specific month.
A low debt-to-income ratio is always better as it says that you don’t have to spend much compared to your income. So, for a jumbo loan, you should prove that your debt-to-income ratio is extremely low. A ratio of 45% or less is good for such loans. This tells the lender that you have the scope to repay the loan as you can save more than half of your income.
To get a jumbo loan, you would have to submit a lot of documents related to your cash flow. Among those, the documents related to your income and assets are the most important. These documents show that you can repay the loan. The lenders require the documents because they need to be sure about your ability.
Some requirements depend on the lender. Some lenders ask for a few other requirements to be fulfilled to give the loan. As this type of loan is not backed by the government, the lenders have the freedom to ask for a variety of requirements.
So, you need to discuss the requirements clearly with the lender.
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Difference Between Jumbo Loan and Government-insured Loan
Each state has a certain maximum amount for government-insured loans. Any loan up to that amount is counted as a government-insured loan for that specific state. For Texas, it is $647,200.
The jumbo loan starts where the government-insured loan ends. This means any amount of loan bigger than the maximum amount of a government-ensured loan is called a jumbo loan. Unlike government-insured loans, jumbo loans don’t have any upper limit. Truly the sky is the limit here.
Government-insured loans are secured by Government-Sponsored Enterprises, especially Freddie Mac and Fannie Mae. On the contrary, jumbo loans are not secured by such types of Government-backed organizations. It is riskier from the perspective of the lender. As the amount and rate are huge, borrowers also find it risky.
Purpose of the Loan
Government-ensured loans are typically provided to meet any need. Necessity is the focus when providing a government-insured loan. On the contrary, the objective of a jumbo loan is a bit different. It is provided to buy luxury products like luxury villas, vacation homes, etc.
In the case of Government-insured loans, the rate is not huge as it is secured by GSEs. On the other hand, as a jumbo loan is not secured by any GSE, it is risky for the lenders to provide such a huge amount of money. So, they want huge profits for the risk they take. That’s why the loan rate in the case of jumbo loans is very high.
Cons of Jumbo Loan
Though jumbo loans can help you to purchase your dream house, it comes with some issues too. While thinking about taking a jumbo loan, you need to carefully examine these problems too. Let’s talk about the problems with it.
I’ve already said multiple times that this loan is risky for the lender for a lot of reasons. So, they have a lot of requirements. You need to fulfil all of those to get the loan. Arranging everything needed to fulfil the requirement is often stressful and hassle. It takes a long time and patience.
Higher Interest Rate
If you take a jumbo loan, you should pay a huge amount as interest. This is because the interest rates are higher in the case of jumbo rates. So, while purchasing your dream house, you’re actually spending more than its price.
Larger Down Payment
Jumbo loans demand a larger down payment. In the case of government-insured loans, it is around 10%-15%. In the case of a jumbo loan, the down payment is around 20% or even more. So, after buying the house, you need to start saving bucks immediately.
More Closing Cost
The fees that you have to pay at the time of finalizing the loan are called closing costs altogether. In the case of jumbo loans, the closing cost is always higher than regular loans. So, you actually start to pay a high price for the loan when you just confirm to take it. This is another problem with jumbo loans.
I won’t say that a jumbo loan is not a good thing. But you need to know the cons too.
Frequently Asked Questions (FAQ)
Do you consider taking jumbo loans a good idea?
Taking a jumbo loan is obviously a good idea when you’re looking for buying some luxury product. However, if you want it to be a good decision, you should focus on a few things. Make sure that you have enough options or earning sources to repay the loan. If you don’t have a stable income, don’t go for a jumbo loan. Also, try to pick some lender who gives the lowest rate.
Are jumbo loans related to home prices?
Yes, jumbo loans are related to home prices. The highest amount of government-insured loans is directly related to the median price of properties. As a jumbo loan is higher than the government-insured loans, the starting range of it varies as the upper range of the government-insured loan or the median value of property price varies. Thus, the home price has an impact on jumbo loans.
Here in this article, I’ve talked about the basics of jumbo loans. I hope you’re understood what it is, how it works, and other related things you should know about it. Now it is your time to decide.
A jumbo loan can make your dream come true but decide carefully before you go for it. You would have to fulfil a lot of conditions and requirements to get this loan. Decide after proper research.
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