How to Buy a Luxury Home using a Jumbo Loan

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Everybody dreams of owning a luxury home with all the amenities you could want, but they cost more than nearly anyone could have in their savings. Government-insured mortgages are also just not enough to afford the rapidly increasing prices of modern-day homes. To get a luxury home, you’ll need something larger than a regular loan, a jumbo loan.

What is a jumbo loan?

The function of jumbo loans is nearly identical to conventional loans. To afford a home, you borrow a set amount of money from a mortgage lender and repay it over your mortgage term with interest. The key difference between a jumbo loan and a conventional loan is that a jumbo loan is classified as any total mortgage amount greater than the Federal Housing Finance Association (FHFA) conforming loan limit. In 2021, the FHFA conforming loan limit is $548,250, but this varies by county, and in high-cost counties, this limit can go as high as $822,375.

Getting a jumbo loan

Since jumbo loans are larger than the FHFA limit, jumbo loans cannot be insured by government-sponsored agencies like Fannie Mae or Freddie Mac. This makes them considerably riskier for your lender, so you’ll likely be charged a higher mortgage rate than you would get with a conventional loan. Unfortunately, the Coronavirus pandemic has also made it harder to get a jumbo loan because of the many people who defaulted on their loans. Mortgage lenders have had to bear a large amount of risk, so they have made getting a jumbo loan more difficult.

That being said, getting a jumbo loan is not that different from getting a conventional loan. Once you gather your financial information, like your credit score, assets, and income statements, you can look for a mortgage lender that suits your needs. It’s important to shop around since different lenders have different requirements and even different mortgage rates! If you want, you can get pre-approved for a jumbo loan so when you find the right home, you’ll have a mortgage ready to go.

How to check your eligibility

Since jumbo loans are riskier for your lender than regular loans, the minimum requirements are stricter to ensure you won’t default on your payments. For most loans, the minimum credit score requirement will lie between 620 and 640, but most jumbo loans require a minimum credit score of at least 700. If your jumbo loan is for over a million dollars, this minimum could increase even further up to 740! If you are planning on buying a luxury home, you should first make sure your credit and income are high enough to support it.

A lot of government-insured loans will allow you to make much smaller down payments of as low as 0% to help make the home affordable. But since your loan is for a considerably larger amount, lenders will require a larger down payment to show you can afford the home. This will usually be about 20%, which would be $200,000 on a $1,000,000 home. Additionally, they will check your cash, income, and finances to further verify your ability to make payments. Jumbo loans are more expensive and difficult to get, but it’s one of the few ways you can afford that magnificent home.

Some additional considerations

If you decide to get a jumbo loan, there are still differences between the price ranges of a jumbo loan. For example, you can claim a federal tax deduction using the interest on your mortgage only on the first $750,000 of your debt. So, your tax benefits from getting a mortgage level off after that $750,000 mark.

You should also expect your closing costs and fees to be higher. With a mortgage deal of this size, there are some extra qualifying steps that lenders must perform, so when you try to close, you may be caught off-guard by higher fees. However, this is completely normal and you should factor this into your decision.

Make a deal

If you decide to move forward with a jumbo loan, make sure you have enough savings and income to support yourself. It may seem scary to have to give up some benefits of a conforming loan or to have high monthly payments, but with the right planning, a jumbo loan is not that different from a regular mortgage. You should still keep track of your payments and you can still profit off of home prices rising. Even if you’re nervous, you just have to remember that a jumbo loan is the last barrier to getting your dream home.