If you’re in the market for a high-end home, you may need to qualify for a jumbo mortgage loan. Although the overall application process for jumbo loans is similar to the process for conventional mortgages, the qualifications for approval are often more stringent.
Jumbo loans vs. conventional mortgage loans
A jumbo loan is generally considered to be any mortgage loan above the Fannie Mae limit of $417,000 for conventional loans. In some parts of the country, where the cost of living or home values are higher, the threshold for a jumbo loan increases. Because the risk level for jumbo loans is perceived to be higher, they are usually offered at higher interest rates than conventional mortgages, notes Investopedia.
Stricter qualifications for a jumbo mortgage
Qualifications for a jumbo loan are generally more stringent than for a conventional loan, for several reasons. First, the amount of debt concentrated in one loan is larger, which means a greater loss if the borrower defaults. Second, Fannie Mae does not purchase jumbo loans from banks. As a result, lenders have to find other investors willing to purchase the larger loans in the secondary market or bear the risk of the loan on their own. Third, high-value homes often take longer to sell, since the number of buyers in the market is smaller.
What you need to qualify
Most mortgage lenders require a minimum of 20 percent down for a jumbo loan, according to Bankrate. Also, the income thresholds are higher, since lenders must feel comfortable that you earn enough to cover the monthly amount due. You must also have a good credit history, which demonstrates your ability to handle credit well. Lastly, the home you wish to purchase may need to undergo stricter qualification procedures. According to Broker Outpost, lenders require multiple appraisals before approving a jumbo mortgage loan over a certain amount.
How the housing market affects jumbo loans
Some factors that can affect jumbo loans are beyond a homeowner’s control. For example, if the housing market drops suddenly and home prices decrease, you may no longer have 20 percent equity on your home. When this happens, you may no longer qualify for a jumbo loan, should you need to refinance or purchase a new home. Mapping out your affordability prior to purchasing a home is essential, especially for large jumbo loans where the debt burden is higher.
Jumbo loans help buyers purchasing larger homes by providing a mortgage product that meets their needs. If you’re in the market for a high-value home, a mortgage lender can discuss the relative benefits of a jumbo loan and answer any questions you have about the application process.
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