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The New, Attainable Jumbo Loan

April 6, 2016

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A decade ago, a jumbo loan meant a 30-percent down payment and an astronomical rate. Worse yet, those excruciating terms were only offered by a major bank.

Today’s jumbo loan is far different. With the right credit score and the right down payment, the rate on a jumbo loan is only slightly higher than that of a conventional loan. As a result, the jumbo loan has become far more common. In 2015, lenders provided $320 billion in jumbo mortgage financing, which made up 19 percent of all mortgage lending, according to Inside Mortgage Finance.  

Although this is good news, it also represents an adaptation to a harsh housing market for buyers. With home prices running circles around wage growth nearly everywhere, there are actually regions of the country in which a home that is priced only a tad above the region’s average could require a jumbo loan. This is seen in markets such as Washington, DC, where one in four purchases is now made using a jumbo loan.

As a result, the Federal Housing Finance Agency has unveiled new loan limits for 2016, increasing the number of loans that can be bought and resold to secondary markets. This move affects the Boston, Denver, Nashville, and Seattle metro areas, and several counties across California have significantly raised their limits on conforming high balance loans for 2016. The Denver area saw this limit rise by an astonishing $34,500.

With the jumbo loan growing in popularity and necessity, some common misconceptions remain.

  • You Need a Huge Down Payment to Qualify. Many buyers believe they need to make a 30-percent down payment to qualify for a jumbo loan. This is not the case. Buyers with a FICO score of 760 who make a 10-percent down payment can qualify for an $850,000, 30-year fixed-rate loan. The buyer may face strict requirements when it comes to debt-to-ratio and cash reserves, but lending requirements have been steadily easing over the last three years.
  • Rates on Jumbo Loans are Astronomical Compared to Conventional Loans.In many cases, rates on jumbo loans are not much higher than those on conventional loans. In fact, the rate on the same $850,000 loan in some cases is only 0.25% more than the rate in the same scenario for a non-jumbo conventional loan. Of course, this is for someone with a high credit score. As always, the higher the credit score and down payment, the better the rate.
  • Only Major Banks Do Jumbo Loans. This may have been the case three years ago, but in today’s market, it is common for a nonbank private lender to offer jumbo loans. This is the primary reason jumbo loan rates are falling down to conventional loan levels. Competition is a consumer’s best friend, and in a time when median home prices aren’t far off from jumbo loan standards, competition is intense.

The jumbo loan is starting to resemble a more common, affordable loan. That’s why it’s important to address these outdated concerns people may still have with this product.

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