Jumbo Loan Myths
A jumbo loan is a home loan that exceeds conforming loan limits. Jumbo loans are often used for larger homes. Not everyone who buys these large homes is wealthy and can afford a cash payment. Many need financing. However, there are many myths that surround jumbo loans that make people assume they are not viable options for them. Here are four myths about jumbo loans that need to be debunked.
Single-family luxury homes
Many people assume that jumbo loans are limited to single family luxury homes. However, many different types of properties can be purchased using a jumbo loan. This includes a duplex, a triplex, and a four-unit home. Jumbo loans can also be used to buy a second home as well as that perfect beach vacation home you’ve always dreamed of! Although not common, jumbo loans can also be used to purchase rental properties. The same credit requirements and debt-to-income ratios would apply to this loan as they would with a conventional loan.
$1 million+ homes
This is one of the most widely believed myths about jumbo loans. A jumbo loan is not limited solely to homes that exceed a value of one million. In fact, in most places, a home loan is considered jumbo once it exceeds the $435,100 limit set for Fannie Mae and Freddie Mac loans. There are some places where the limit is higher on a conventional loan. In this case, a loan would be considered jumbo when it exceeds that set limit.
Higher interest rates
It’s true that the average rate for a jumbo loan is higher than the average rate for a conventional loan. However, it is not much higher! Typically, the interest rate for a jumbo loan is just 0.5% to 1% higher than it would be for a conventional loan. Since jumbo loans are so much larger than conventional loans, the higher interest rate is added as extra protection for lenders in the case a borrower defaults and is no longer able to make payments.
Private mortgage insurance (PMI) is required on all conventional loans if the borrower pays less than 20% down at the time of purchase. Mortgage insurance is also required for government-backed mortgages, such as the VA and FHA loan. Lenders who keep and maintain loans without government backing, such as jumbo loans, have more jurisdiction. This is why most jumbo loan lenders do not require PMI. However, this option isn’t available to everyone. In order to get a jumbo loan without PMI, you must:
- Have an income that will be enough to cover current debt and the new home loan
- Have enough money in savings and/or investments to protect against any financial problems