When you want to buy a home, you can go and get various loans. But if you are looking for a luxury home, you want to get a jumbo loan.
Homes in California are getting more expensive. Luckily, there are several ways to get jumbo loans in California.
If you follow a proper procedure and qualify for the loan, you can get it in no time. Before you learn how to apply for the jumbo loan, learn more about it first.
What is a Jumbo Loan
Jumbo loans fall into a specific category of loans you can apply for in the US. Unlike FHA loans and conventional loans, they lack the approval of Freddie Mac and Fannie Mae institutions. Thus, lenders of the jumbo loan take the risk of the jumbo loan going back to default. Or, in simpler terms, loaners not returning the debt they owe to the lenders.
Of course, that is rarely the case. Lenders of jumbo loans have a set of procedures to determine you are eligible to return the money you borrow. There is another reason for this, and it is due to the specific structure of the American mortgage market.
Secondary Mortgage Market
The aggregator behind a housing market is the secondary mortgage market. The purpose of this market is to allow Freddie Mac and Fannie Mae to trade, buy, and acquire mortgages for their portfolios.
Also, mortgages and loans on the secondary mortgage market are available for banks and other parties of interest. Here, you may go and buy a mortgage loan from a party, repay the loan and get the property.
The difference to the primary mortgage market is in the chance to get a mortgage loan from a primary lender. These lenders include banks, mortgage brokers, and credit unions. For mortgage loans to reach the primary market, these lenders trade them on the secondary mortgage market.
Freddie Mac and Fannie Mae
On the secondary mortgage market, the usual buyer for mortgage loans is Freddie Mac and Fannie Mae. These are companies or organizations sanctioned by the US government to help the housing market.
Their purpose is to acquire homes and later resell them back to the market. That way, the market gets the necessary protection during financial and other crises. Also, it helps the housing market to remain stable for trading.
Even with government backing, Freddie Mac and Fannie Mae can help and influence the market to a certain extent.
These organizations can help you with loans for homes up to $500.000. Yet, some buyers want homes that are worth more than exceed that limit. Jumbo loans are there to help them with the purchase.
Jumbo loans are loans for purchases that exceed $500.000. You may apply for them with creditors or mortgage brokers that deal with this type of loan. Often, you take these loans to return them in 15-30 years periods.
They require a formidable down payment (around 30% of the total cost of the loan). And these loans require proof of income that supports your claim that you can pay the debt.
While it sounds like a considerable hassle, getting a jumbo loan is easy with proper finances and a mortgage broker.
When to Use a Jumbo Loan
Before you start the application, rethink if you need a jumbo loan. There are other loans to consider like conventional loans and FHA loans. There are other options like refinancing mortgages and loans.
Finally, your credit score determines your ability to get a loan. Even with the best intentions, you can purchase only the properties in tune with your finances.
That moves the conversation to why you want to buy a specific property. Depending on that, there are ways to work on finances and get the loan.
Purpose of Purchase
People apply for jumbo loans to buy luxury homes. At least, that is common thinking. You can also buy a property with 2-4 housing units or another similar property. It all comes down to what property you want to purchase in the first place.
For example, you may want to buy a luxury home for your family. Then, this type of loan is ideal if you have stable finances and can afford it. However, you may be a businessman looking to rent a property.
Then, you can get the loan, buy a property or house with 2-4 housing units and rent them. That way, you can repay the debt faster and turn a profit.
Yet, all your decisions depend on your finances. With jumbo loans, there are several factors you want to consider. Still, credit score remains the top factor when applying for a jumbo loan.
The primary problem with this type of loan is that you need solid finances. You want a stable income, a good credit score, and a low debt-to-income ratio. On top of that, you need to prove you have either cash reserves or a portfolio to support your mortgage loan.
Ensure that you have a stable income, are in insignificant debt, and planned out finances. Then, you may approach the market.
The primary reason to get a mortgage broker is to get a better insight into the housing market. For example, the California market is a sellers’ market at the moment.
The concept of a seller's market refers to the fact that the market works in the sellers' favor. Since there is a shortage of homes to sell, they dictate higher prices. And, they may offer less in terms of home quality and amenities for the same price!
So, finding a mortgage broker is crucial for not only getting the loan but getting the property. Consider paying lawyers, mortgage brokers, and appraisals as part of the total cost of the property.
Applying for Jumbo Loan
Applying for a jumbo loan is a straightforward process. You work on your finances on the credit score and finances. Then, go to the mortgage broker to get pre-approved for the loan. Find the house, get loan approval, and buy the home.
The best thing about any loan, and jumbo loan for that matter, is that you have time to prepare. Out of all conditions, getting a down payment and cash reserves is a sort of one-time investment. You collect the money and leave it on the side until you need it.
On all other conditions, you can work up to the moment of getting the loan. It is advisable to find an advisor when you work on your financial projections and credit score.
The primary issue of a jumbo loan is a down payment. For example, with an FHA loan, the down payment is as low as 3%. And, with a conventional loan, it may go up to 15%. However, the down payment of the jumbo loan is 30%!
That is a lot of money to put as a down payment. So, when you want to take a jumbo loan, start saving up for the down payment. Look around to save up somewhere between $100.000-250.000 if possible. Everything less than that is far from enough to make you eligible for the loan.
Invest the market, look at the median price of the housing you want to purchase. Start saving for the down payment if you want to buy the property tomorrow.
Now, a credit score is the essence of any financial planning. For any loan type and especially jumbo loans, you need a good credit score. That credit score should be more than 620 and even higher.
The excellent thing about a credit score is that it changes and affects everything you do to apply for a loan. To get a higher credit score, you want to reduce debt and increase income. And, you want to show a clear payment history with long-standing credit accounts.
That means that you want to get a better job or another stream of income. Then, decrease the debt as much as possible. Car payments, phone payments, and utilities matter less. Avoid having multiple credit cards, loans, and mortgages. That is the core of actions you want to undertake to improve your credit score.
The debt-to-income ratio refers to the amount of money you have after you deduct the debt from your monthly income. The lower the percentage of the ratio the better, since it states the amount you can leave for the mortgage payment.
With a high debt-to-income ratio, you have virtually no money to spare for your mortgage payment. The mortgage broker understands that from the moment they check your financial reports. Then and there, they decide you are unable to apply for the loan.
Also, the fastest way to improve your credit score is to work on the debt-to-income ratio. Get another job, or get another stream of income.
Cash reserves or savings is where most applicants slip. Sure, you can get money for the down payment. And, you can reduce the debt and get a new income stream. The problem occurs when you also have to save money as savings or cash reserves.
Financial planning becomes crucial at this point. You need an idea of what you want to do and how to work on both down payment and savings. Of course, that all is possible. People get approval for jumbo loans daily.
You are no exception. Simply, get a professional or person with experience to help you.
Get all the documents you need for the jumbo loan. Ask a mortgage broker to provide you with a list of documents you need for applications.
Usually, a mortgage broker deals with this part of the application. Again, make sure that everything is in order and check California laws.
Make the Purchase
With loan approval, go and make the purchase. Get the appraisal for the home, and pay for the housing. The total price of the home includes possible repairs and professional services.
With that, all that is left is to pay off the mortgage and enjoy your new home.
Get a Luxury Home
Getting a luxury home is a straightforward process. At least it is when you have your finances in order.
Work on your credit score. Increase your income, and get the loan that grants you the house of your dreams.