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3 Things to Know Before Applying for a Jumbo Loan

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The recent recession and slowing of the housing market shrunk the availability of the jumbo mortgage for a couple of years. But these super-size loans are back.

“An estimated $54.0 billion in non-agency jumbos were originated in the first quarter of 2013, up 14.9 percent from the first quarter of 2012,” according to Inside Mortgage Finance, a publication that reports mortgage-related news.

If you are shopping for a home in an area of the country where the cost of living is extremely high (the New York metro area, Hawaii, for example), or if you’re buying an extremely extravagant piece of property, it’s likely that you’ll be applying for a jumbo mortgage. So what can you expect to encounter during the lending process?

Higher interest rates

Jumbo mortgages are riskier for lenders than other home loans. Not only are most ineligible to be sold to mortgage giants Fannie Mae or Freddie Mac because they exceed the conforming loan limit (a loan that exceeds $425,000 in most areas of the U.S.; $$625,000 in a few high-cost areas)—meaning that banks are often forced to keep them on their own books—but you’re more likely to default on them since you’re borrowing a substantial amount of money. As a result, you should count on paying a slightly higher interest rate than borrowers with a conforming loan. For example, a 30-year fixed mortgage currently has an interest rate of 4.14 percent, whereas a 30-year jumbo mortgage charges a 4.32 percent interest rate.

Stiffer requirements

Because jumbo mortgage holders are at greater risk to foreclosure, most lenders require a down payment of at least 20 percent, and some will even require 25 to 30 percent down. (On a refinance, you will need at least 20 percent equity in the property.) Additionally, be prepared to give documented proof of your income, and don’t be surprised if you are turned down if your debt-to-income ratio exceeds 38 percent (including your expected monthly house payment) or if you have a less-than-desirable credit score.

More options

During the mortgage crisis, most jumbo loans available to borrowers were adjustable rate mortgages (ARMs) and hybrid ARMs, which had a fixed-rate for a certain period of time that adjusted later on. Nowadays, financial institutions are offering more jumbo mortgages with fixed-interest rates.

And while prerequisites are stricter from jumbo mortgage borrowers, those looking for a large loan now have more choices for lenders than they have had in previous years as more banks and credit unions now offer this type of loan.

 

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