A few people can afford to cash out and buy a house without any loans. The reality is that most of us are looking for a good deal when taking out a mortgage so it doesn’t end up eating too much of our paycheck.
Mortgages are regulated much better than they used to be, and that is why there are quite a few types of mortgages out there to fit different purchasing potentials. Loans can be backed by the government or borrowed from a private entity. In today’s article, we are going to talk about the latter.
When deciding on a budget, you need to consider that some loans have a cap much lower than others, and there are pros and cons for every option. Which one you will take, depends on the property you are checking out, your financial situation, and your credit history. First, we need to understand what is a conventional mortgage, what is a jumbo loan, and then we will compare the two.
A home buyer can seek out a loan from private lenders or government facilities. House hunters who want a house above the median price usually turn to private lenders. It is because the government entities offer a low cap on the amount you can borrow but have less strict regulations.
While the government entities offer lower limits on the amount of money you can borrow, conventional loans are usually larger and thus have higher standards for the borrower. Conventional loan lenders are private companies, but two government enterprises, Fannie Mae and Freddie Mac, still guarantee some of them.
You should pick your lender carefully, especially if the loan is not backed. Work with local companies that you can easily hold accountable. If you are from Florida, seek out conventional mortgage loans in Florida. If an offer seems too good to be true, it probably is.
Conventional mortgages have fixed rates, can be up to 30 years long, and have a high loan limit. Depending on the median house price, each area has a different loan cap, but it cannot exceed $980,000, even in high-cost areas. The average cap for the US is about $650.000 at the moment.
On the other hand, house buyers looking at houses in a more expensive range will not be satisfied with these loan limits. That is why there are non-conforming conventional loans, with no maximum amounts and much stricter conditions for borrowers.
A jumbo loan is essentially one type of conventional mortgage that is considered a non-conforming loan because it is not backed by any enterprise and has no set maximum amount. On the contrary, jumbo loans have a limited minimum amount since they are used for buying luxury properties.
Jumbo loan rates are fixed and can have a 30-years-long lifespan, but the rates are much higher since jumbos are a great risk for the lender. Not every borrower is eligible for the jumbo loan, and the lenders set strict regulations and conditions to protect themselves from the risk.
Similarly, not every property can be bought using jumbo loans. Jumbos are used for buying luxury properties, so the borrowed amount needs to be higher than the conforming loan limit set by the Federal Housing Finance Agency.
Jumbo loans cover all sorts of properties, and the criteria vary accordingly. The conditions will differ for a home purchase, investment property purchase, or land purchase. When talking about the borrowers’ particular circumstances, veterans can qualify for VA jumbo loans and have some benefits. However, the rates and the downpayment would still be higher than for a conforming loan.
When referring to the eligible people for the jumbo loans, we use the acronym HENRY – High Earner, Not Rich Yet. Those are the people in favorable financial situations who haven’t just yet collected enough liquid assets to buy a property in cash.
To be eligible for the jumbo mortgages, you need to have a credit score above 680 and a debt-to-income ratio around 35%. An average jumbo loan candidate should earn more than $300,000 a year, have an established credit score, and have a retirement account.
So, is there a contest between jumbo and conventional mortgages? Well, not exactly, as both cover different needs that borrowers might have. Conventional loans are suitable for an average borrower with a good credit history. An ideal candidate for a conforming loan must prepare a 20% down payment, have a credit score of at least 620 points, and have no more than a 43% debt-to-income ratio.
Jumbo borrowers have to comply with much higher standards. For example, one jumbo loan requirement for a single-family home in a price range from 1 to 2 million dollars is a minimum 10% down payment. That is $200,000 just for the down payment.
It all comes down to your needs. If you seek to buy an investment property, conventional loans could be a better option. If you are looking for luxury homes but have no liquid assets – jumbo loans are for you.
An average jumbo loan monthly payment is $2,500 for a $500,000 loan amount with a 30-years-fixed rate. Furthermore, expect to pay around $1,200 per month when taking out a $250,000 conventional loan. Ultimately, these loans do not fit lower-earning households and families struggling to pay off debts. Only average and above-average borrowers could afford these two mortgages.
Did you ever wonder if there is a way to lower your monthly mortgage payment? An effective, although the somewhat expensive way is buying mortgage points. Buying points could discount your total loan amount and reduce the rate. You can save thousands of dollars in interest. It is affordable in the long run, but it requires liquid assets.
Ultimately, the mortgage you decide to purchase should not exceed your means. Affordable could be a subjective term for each buyer, so try a lender you trust and consult with them whether you are a jumbo loan or a conventional loan candidate.