The term “affordable housing” has no set parameters, and the reason is because earning potential and home values can differ so drastically from one region to the next. What falls within a normal range for families living in Los Angeles may seem outrageous to someone living in Toledo, Ohio, for example. Unfortunately, mortgage lenders that set national standards for loan amounts don’t always recognize such vast disparities, and they artificially limit loan sizes.
It is for this very reason that options like Jumbo and Super Jumbo loans exist, to accommodate would-be homeowners who not only face an inflated housing market, but who also enjoy greater earnings and can afford more expensive properties if given the opportunity to qualify for larger loans with higher debt-to-income ratios.
What are Jumbo and Super Jumbo loans and what are the potential pros and cons of utilizing these options? Here are a few things to consider before applying.
What are Jumbo and Super Jumbo Loans?
Last year, the Federal Housing Finance Agency (FHFA) announced maximum conforming loans limits for one-unit properties in 2018, with baseline limits for Freddie Mac and Fannie Mae increasing to $453,100 from the previous limit of $424,100 in 2017.
Seasonally adjusted data showed an average housing price increase of 6.8% between Q3 2016 and Q3 2017, prompting the update to baseline maximum conforming loan limits by the same percentage.
Even so, this limit may be untenably low for certain regions where meridian home prices exceed the set baseline. For these regions, the FHFA bumped up the ceiling loan limit for one-unit properties to $679,650, or 150% of the standard baseline.
There are currently 220 counties in the U.S. that are recognized as having higher average mortgage rates and that therefore enjoy higher mortgage loan limits.
However, this still precludes a number of properties in certain affluent areas. Just because people have the income to afford million-dollar homes doesn’t meant they can purchase them outright, without the aid of a loan. What are these buyers to do?
Jumbo and Super Jumbo loans could be the answer, thanks to options providing mortgage loans of up to about $20 million. These loans not only offer greater flexibility in terms of borrowing potential, but they may also provide fewer restrictions on other loan terms.
Technically, Jumbo loans, also called non-conforming loans, are any that exceed standard conforming loan limits, which means they’re too big to be backed by the U.S. government. They’re often designed to finance luxury homes in competitive, high-priced markets. These loans tend to go up to about a $2 million, while Super Jumbo loans could be found for as large a sum as $20 million.
Only about 4% of all loans in the U.S. fall under the category of non-conforming loans, and the amount buyers are eligible to receive could depend on income, down payment, the type of property purchased, and even profession, as well as the lender a buyer chooses to work with.
Advantages Associated with Jumbo Loans
When the limits on a traditional loan aren’t substantive enough to account for the property you want to purchase, you’ll have to look into other options, and Jumbo or Super Jumbo loans could provide the solution. Not only do these loan options offer additional financing for properties that exceed conforming limits, but they also tend to allow for a higher debt-to-income ratio and there are options available for up to 90% LTV (loan-to-value).
Like other loan types, there are some options to consider, including both fixed-rate loans and adjustable-rate mortgage, or ARM loans. In addition, there are many programs available that make Jumbo loans more attractive to buyers with an exceptional credit rating and credit history, as well as proof of several months’ worth of mortgage payments (say, 6-9 months) held in reserve.
Possible Drawbacks of Jumbo Loans
The greatest potential drawback of taking out Jumbo or Super Jumbo loans is the monthly mortgage payments you’ll face. However, buyers approved for such loans will have to qualify, so ostensibly, they have the means to make these payments.
The greater difficulty for many buyers seeking Jumbo or Super Jumbo loans is finding lenders that offer them. Because these loans are not backed by the government, they are not offered by every lender, and those that offer them don’t tend to advertise. These types of loans are considered a niche market, which means finding a lender can be hard.
Qualifying for a Jumbo or Super Jumbo Loan
Qualifying for a Jumbo or Super Jumbo loan is much the same as qualifying for any other type of loan – it is based on a variety of factors such as your income and debt, your credit rating, your down payment and ability to pay a monthly mortgage, the value and type of the property you plan to purchase, and so on.
If you’re interested in taking out a Jumbo or Super Jumbo loan for a residence, vacation home, or investment property in Hawaii, you’ll want to speak with experienced professionals like those at Cardinal Hawaii to explore your options and find out if you qualify.