As home values in King County and around Seattle continue to go up, the demand for jumbo loans is also on the rise. If you are looking into purchasing a home in the area, you are probably wondering if you will need a jumbo loan to finance your dream purchase. The good news is that with such a strong local real estate market, jumbo loans are more reasonable and common than they were in the area a few years ago. You should still inform yourself before committing to one of these massive financing instruments.
Jumbo Loans Vary on Location
The federal institutions, Freddie Mac and Fannie Mae, follow housing prices in regions closely. They then set the limit for conventional or conforming loans, based on what they believe is a fair market value for properties. These amounts vary widely between states and even between counties within a state. For example, in the state of Washington, a single unit conforming loan will generally get capped at $424,100. However, in King County, that cutoff amount for a single-family dwelling goes up to $540,500.
On the other hand, mortgages even a single dollar over that cutoff are considered jumbo loans, and both Freddie Mac and Fannie Mae will decline to purchase them from your lender. That can be beneficial, because you know your lender won’t change, like it often does with conventional or conforming loans.
Lenders Set Their Own Standards for Jumbo Loans
Conforming loans must meet special guidelines, especially if your lender hopes to sell the instrument to Fannie Mae or Freddie Mac. With jumbo loans, since your lender will likely retain the mortgage indefinitely, they can make their own decisions about credit scores and other key underwriting guidelines. Depending on your lender, that could mean it is easier to get approved for a jumbo loan or much more difficult. Your lender will generally expect a credit score of 700 or higher, while 650 is often high enough for approval on conforming loans.
You may also be subject to stricter debt-to-income ratios than others. That means that financing a vehicle or maxing out a credit card could impact your ability to get a loan. For most conforming loans, lenders cap your debt-to-income ratio at 43 percent, including your mortgage payment. For some jumbo lenders, that number could drop down to 36 percent, limiting your ability to use credit for other purchases for the near future.
More Debt and Bigger Down Payments Are Involved in Jumbo Loans
The larger the amount financed, the bigger your overall debt load will be. You’ll have to spend more of your income, possibly for more years, to fully pay off your financing. You will also need more liquid capital up front to purchase your home. Buyers with less than 20 percent down available will pay for the convenience of that lower up-front investment. You will likely need to pay for private mortgage insurance (PMI), which can substantially increase your monthly payment.
Additionally, a lower amount down could increase the interest rate for your loan. That can end up costing you thousands of dollars over the life of your loan. Make sure that you factor that into your decision regarding how much mortgage and house you want to invest in when you buy. The good news is that with a stronger real estate market, there is less of an interest hike on jumbo loans than there was during the housing and mortgage crisis in the late aughts and early teens, when borrowers could pay as much as a 3 percent premium.
In fact, with so much demand locally for jumbo loans, lenders who offer jumbo mortgages are offering very competitive packages and rates currently. Right now could actually be a great time to finance your home purchase if it falls above the cutoff for conforming mortgages.