When the time comes to purchase a new home, it’s important to carefully consider all of the financing options available. After all, a home is one of the most significant and most important investments you’ll ever make, and you don’t want to make a poor decision that will end up costing you or hurt your finances down the line. And if you’ve come across the limits for conventional conforming home mortgages, you might be worried about financing if your dream home comes with a hefty price tag. But have no fear! If the mortgage amount that you need is above the threshold for a conventional conforming loan, a jumbo mortgage from a Texas lender may be the financing solution for you.
What is a Jumbo Mortgage?
As the name suggests, a jumbo mortgage is a loan amount that is larger than your typical conforming home mortgage. Each year, the Federal Housing Finance Agency sets new conforming loan limits. Mortgages that fall below the specified amount are considered conforming, as they adhere to the underwriting guidelines of Fannie Mae and Freddie Mac. Jumbo mortgages are those that fall above this threshold; this means that Freddie Mac and Fannie Mae won’t guarantee or purchase mortgages above the specified amount.
Throughout the United States, some counties located in expensive and high-demand areas have higher thresholds. But for those applying for a jumbo mortgage in Texas in 2019, the threshold for non-jumbo conforming loans is $484,350 for single-family homes. As of 2019, no Texas counties have a higher limit.
How Do Jumbo Mortgages Differ from Conforming Home Mortgages?
Aside from having a higher dollar amount, jumbo mortgages have several key differences from their conforming counterparts.
Just like a smaller conforming loan, eligibility for a jumbo mortgage depends on several factors like credit score, employment status, income, and how much cash you have on hand. However, you’ll find differences between jumbo mortgages and conforming loans in the level of standards that must be met to be approved for the loan.
- More Rigorous Credit Requirements. As if it wasn’t already challenging to qualify for a loan, the credit score needed to be eligible for a jumbo mortgage is even more stringent. If you are borrowing that amount of money, banks want to be sure that you can pay it back. Your credit score will likely need to be at least over 700 (and closer to the 720+ range) to qualify.
- Lower Debt-to-Income Ratio. To qualify for a non-jumbo mortgage, you typically need to have a lower debt-to-income ratio (DTI). This number compares the total amount that you owe each month to the money that you have coming in as income. Typical conforming loans require under 43%; for jumbo mortgages, this number needs to be closer to 36%.
- The Need for Accessible Cash. Along with credit requirements, you’ll have to prove that you have money on hand to cover the payments if something happens to your income stream. This amount depends on the exact size of your loan, but you’ll need to submit W2 tax forms and pay stubs to verify the information.
Even though the gap between jumbo and conforming mortgage interest rates has been closing, some financial institutions still charge a higher interest rate for jumbo mortgages. Historically, rates can range anywhere between .5% to 2% higher than non-jumbo mortgages.
Adjustable rates are also more popular amongst jumbo mortgages than conforming loans, meaning that the interest rates may be lower at first but will increase as time goes on.
Many jumbo mortgages also come with higher down payment requirements. Depending on what financial institution you that funds your mortgage, you may have to put 20% or even 30% down. In other words, you likely need a hefty chunk of change on hand to even qualify for the loan.
Can You Avoid Getting a Jumbo Mortgage by Taking out Multiple Mortgages?
Some people wish to avoid the higher jumbo mortgage rates and strict qualification requirements that come with a jumbo mortgage. They do this by taking out a second mortgage or something called a piggyback mortgage. This means that you’ll have two loans taken out at the same time that are secured with the same collateral. The first mortgage will be just below the threshold so that it is still a conforming loan; the second will cover the remaining balance and also fall within the conforming limits. This is essentially taking out two smaller loans instead of one jumbo.
Sometimes multiple lenders are used for the two loans. Other times the loans are taken out with the same bank or credit union. Typically, these take the form of 80-10-10— the first mortgage is 80% of the purchase price, the second loan is 10% of the purchase price, and the borrower brings a 10% cash investment to the table. This breakdown isn’t a hard and fast rule, however. Some combinations may look more like 75-10-15, or whatever works for you and your lender.
Regardless, borrowers will benefit from a lower interest rate on the first loan and be able to pay off the second smaller loan quickly.
What Are the Benefits of Using a Credit Union for a Jumbo Mortgage?
Credit unions can help you in the mortgage process, whether you need a jumbo, conforming, or piggyback mortgage. Credit unions offer benefits like:
- Competitive Mortgage Rates. Since credit unions are member-owned, many can offer very competitive interest rates and loan terms.
- More Flexible Borrower Requirements. Sometimes, borrowers can benefit from less stringent borrower qualification requirements, especially if they already have an existing relationship with the credit union.
- Excellent Customer Service. Credit unions put their members first, which translates into remarkable customer service experiences. You’ll work with friendly local faces who want to help you find solutions to your financing needs.
Not all credit unions are created equal, though. You’ll want to do your research to find a lender that works for your situation. It’s always essential to work with knowledgeable professionals that can help you determine what type of loan is the best fit for your specific financial needs.
You’ll be holding the keys to your new home in no time!