Jumbo loans are any residential mortgage that exceeds the county's high balance loan limit. In Sonoma County, California, the maximum loan size for a single-family home is $554,300, so a mortgage for anything larger than that would be jumbo. According to the Wall Street Journal, 24% of mortgages approved were jumbo at six of the largest U.S. banks in 2015, up from 21% the year before.
Jumbo loans are sold in a smaller secondary pool and as such have tighter credit guidelines, which makes them harder to come by. Mortgage lenders examine jumbo loan applicants' credit scores, debt-to-income ratio and down payments very closely.
If you don't have much equity in the property you're trying to finance, but you do have access to cash, you may have some wiggle room if you put less than 20% down. That's because the winning combination for a jumbo mortgage can be a 15% down payment, plus a 700 credit score or higher. Here, we'll explore why.
Putting a higher down payment upfront makes you appear as less of a risk to lenders and your bank may reward you with more competitive rates and fees, compared to prospective borrowers with a 10% down loan.
As a result of making a larger down payment, the long-term affordability of the house will be higher. A better interest rate means you'll pay less over time, while you'll finance a lower amount.
Private Mortgage Insurance (PMI)
The PMI associated with your loan will also likely be lower with a 15% down payment as opposed to just 10%. Again, the bank will likely review you as less risky, given you have more "skin in the game", although your property type, credit score and loan size do play a role.
Dropping PMI Faster
This is the number one reason to put 15% down: A PMI is required for a minimum of two years, after which you can petition to get out of the PMI if you feel you have accumulated 20% equity in your property based on appreciation in your area.
Dropping your monthly mortgage insurance means a lower mortgage payment and a savings of several hundreds of dollars per month. While there are loan programs that allow for 90% financing with no mortgage insurance, you will pay for it with a higher interest-rate, higher payments and higher fees, with no option to reduce your payments other than by refinancing.
Putting 15% down could give you a bigger bang for your buck without putting you through the rigmarole of refinancing — and paying fees all over again in the process. If you're considering a jumbo mortgage, be sure to examine your options with the cash that's on hand. Many jumbo mortgage loan programs also allow gift monies, which can help you secure a bigger and better home.
Also keep in mind that your credit score plays a huge role in determining what type of rate you'll receive on your financing. If you'd like to know where you stand, you can view your two credit scores, updated each month, for free on Credit.com or view your annual credit reports for free at AnnualCreditReport.com.
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