4 Things You Should Know About Jumbo Loans Before Investing

If you are looking to invest in a vacation rental property, a second home, or even a first home in a high priced area you may find that traditional loans do not give you the amount you need to pay for the property. If conforming loans did not give you the monetary amount you need, Jumbo Loans may be what you are looking for. Here are 4 things you should know about Jumbo Loans before taking one out and investing in a property with it. 

A Jumbo Loan, also known as a jumbo mortgage and non-conforming conventional mortgage, is a loan that exceeds the maximum amount for a traditional conforming loan set by the Federal Housing Finance Agency. Jumbo mortgages were created for financing luxury properties and high value homes. This max limit is adjusted every year by the Federal Housing Finance Agency (FHFA), and as of 2022 is $647,200. Jumbo loans are considerably riskier for the loaner as Fannie Mae and Freddie Mac do not protect them if the borrower defaults. For this reason many banks and lenders do not provide options for Jumbo mortgages.

Where a jumbo loan starts after exceeding the conforming loan limit of $647,200 a super jumbo loan starts after exceeding the jumbo loan limit of $1,000,000. Other than the limit, jumbo loans and super jumbo loans act the same way. 

Jumbo loan interest rates are similar to regular interest rates in many ways. They can come with a fixed or adjustable interest rate, and the terms vary depending on the lender. While many would assume that jumbo mortgage loans have a higher interest rate because of the size of the loan that is not necessarily true. Jumbo loans interest rates are adjusted based on the lender’s analysis of the risks involved. The lower the risk, the lower the interest rate. 

The requirements to get a jumbo mortgage loan vary from lender to lender, but some safe rules to follow to quality for one are: 

• Have a low-debt-to-income (DTI) ratio. While many people assume that you need to make within a certain bracket amount of money to take out a jumbo mortgage, the better goal is to have a low DTI. This shows that you do not have a lot of debts you are already paying compared to your income, and is a good indicator that you can make your monthly payments. 
• Have a high credit score. Most lenders will expect you to have a credit score around 720 before considering you for a jumbo mortgage. However, if you fit the other criteria your lender may be willing to make an exception for your lower credit score. 
• Have liquid assists and cash reserves. It is very common for lenders to ask for jumbo loan borrowers to prove that they can make the first year of payments. Lenders also want to be sure that potential borrowers can make the down payment which is between 10%-20% down. 
• Have documentation to prove your financial health. Because lenders take a big risk with jumbo loans as they are not protected by Fannie Mae and Freddie Mac if the borrower defaults, many lenders will ask to see documentation of your W-2s, full tax returns, and information on your other investments for proof of your financial reliability. 

One of the hardest parts of taking out a jumbo loan is finding a lender as many banks and personal lenders do not provide options for jumbo loans. Some of the best ways to find jumbo mortgage lenders are: 

1. Look through local citations and listings. Many jumbo loan lenders will be on a jumbo loan lender list in your local area. 
2. Talk with your bank. Though many banks do not provide jumbo loans they may have connections with a jumbo loan lender in your area. 
3. Talk with your real estate agent. Most real estate agents have different loan lenders that they work with, and with their network will be able to find a jumbo loan lender for you. 

Jumbo mortgage loans are a great way to invest in high price houses and additional properties. Remember to do your research and find a lender that works well with you and your needs.