After reaching a certain annual income, you might be interested in finding the definition of a jumbo mortgage.
It is something like a mortgage with loaned values higher than the limits set by the two federal agencies (Fannie Mae and Freddie Mac). Another simplified definition of jumbo mortgages would be “loans for luxury homes or investment properties”.
Here’s the thing: the Office of Federal Housing Enterprise Oversight sets a limit to how much mortgage companies can loan people as a way to preserve the overall health of the financial system. These limitations are an attempt to avoid another crash like the one in 2008 where part of the problem was exactly lending more than borrowers could repay. Jumbo mortgages are exceptions from these credit limits. Therefore, any loan higher than the limit recommended is considered a jumbo mortgage.
What is the bar for a jumbo loan? What constitutes a jumbo loan? It depends from county to county. In most parts of America, to qualify for a conforming loan in 2019, one must purchase a property below $484,350 - with $31,250 higher than in 2018. One dollar above can be constituted as a Jumbo Mortgage. In high-cost areas, the limit for one-unit properties is $726,525.
While the metrics for approval for a jumbo mortgage are basically the same as for regular loans, the bar for the approval is set much higher. The applicant must have outstanding credit, there might be more paperwork involved and the lender, after the recession, is very carefully assessing the credit risk. Several years of tax filings may be analyzed before the bank grants the loan. If you have a foreclosure in your past, for instance, chances are you won’t qualify for a jumbo mortgage. Moreover, you must demonstrate the possession of strong financial assets. Lenders expect you to pay a downpayment between 15 and 30% of the property you intend to buy, though some lenders are easing up on the minimum requirements. There are private lenders who would accept even a 5% down payment, though the maximum loan amount will be considerably lower.
With the tax reform of 2018, a few things changed for jumbo loans. Now, interest on the first $750,000 in mortgage debt of a primary residence or second home is tax-deductible. For the ones who are married but filed separately, you can each deduct up to $375,000. For mortgages that were active before December 16, 2017, when refinancing the borrower can still deduct interest on up to $1 million in mortgage debt, as long as the refinance is under the balance of the original loan. Plus several details, so contact a tax specialist to better advise you on your specific situation.
Our advice would be to not stretch your finances if you’re not a high-earner or part of the upper class, with incomes at least double the median wage. For example, a family of four is considered in the top tier with an annual income of $156,561. Now, you may opt for a jumbo loan especially if you want to purchase a duplex, triplex or fourplex. As you can see in our SWOT analysis of a duplex in Austin, TX, using one unit as your primary residence and renting out the remaining ones will reduce the burden of debt on your shoulders. In fact, you may end up living for free! With a jumbo mortgage, you can start an Airbnb business right away. Some lenders may even allow you to purchase a second home or a vacation rental with a jumbo mortgage. So, it’s important to shop around and see what offer best fits your needs.
Read on for a context that will help you better understand what are jumbo mortgages.
The Phoenix area is famous for its luxury real estate in Paradise Valley, Scottsdale, Mesa, and Tempe. The average salary in the region is $53,514 while the median income in the US is $47,060. And the average cost of a home in Scottsdale is two times higher than in Phoenix, for example. Knowing that only 50% of the income can be allocated toward housing, this means that the monthly payment cannot be higher than $2,000-2,200. This also limits the amount of money one can borrow. Of course, spouses may apply for a mortgage together in order to purchase a larger home, but as you know, anything beyond $484,350 turns into a jumbo loan. And consequently, everything is higher, from the interest and APR to homeowners insurance and property taxes.
The definition of a jumbo mortgage may turn you off, but you don’t have to think only about your present needs. Try to see the whole picture and how a larger property can provide you enough income to offset the costs associated with owning a large property.