A jumbo mortgage or jumbo loan is a kind of home financing that the amount exceeds the loan limits set by the FHFA (Federal Housing Finance Agency). This amount varies depending on location. For most counties, the maximum limit is $417,000. For a few upscale counties with several luxurious homes, the limit increases to about $636, 000.
Jumbo loans are designed to finance expensive homes and properties, and they come with their unique requirements and tax implications. The credit score requirement is higher than what is needed for normal mortgage loans. Also, you must have a high amount of accessible cash which will be used to evaluate your ability to pay back your loan.
Before getting a jumbo mortgage, there are a few things that you must understand. Those things are explained in detail below.
1. Tax implications of jumbo loans:
You might be aware that you can deduct mortgage interest that you pay every year from your taxes. But, it must be noted that a jumbo loan won’t give you a large tax break. Few people know that the interest can be deducted as long as the mortgage is $1 million or less. If the mortgage is larger than $1 million, you can’t get the full tax deduction.
So, it is possible that taking out two smaller loans might serve your interests better than taking a single jumbo loan. You might save more on taxes that way. Before applying for the loan, crunch the numbers and see how much you stand to save for yourself.
2. The rates for jumbo loans:
Jumbo loans usually have higher interest rates than conventional loans. The higher interest rates involved are as a result of the large amount of money involved, the lengthier time it takes to sell an expensive home and a lot of other factors. But today, things are changing. Jumbo mortgage loans have interest rates that are the same as conventional loans or even higher! Evaluate the interest rate that a lender is offering you, and if you are not satisfied, you can move on to another lender.
3. More paperwork is needed:
Jumbo loans involve more documentation than conventional loans. If you are self-employed, you may be required to provide two years tax returns instead of one. A lot of people that take jumbo loans have multiple sources of income or complex sources of income. So, don’t be overwhelmed when you see the amount of paperwork involved.
4. High-income earners apply for jumbo loans:
If you are a high-income earner, a jumbo loan might be best for you. Most of those that apply for jumbo loans are high-income earners that earn about $250,000 to $400,000 per year. They are people that earn a high income but not rich enough to afford to buy a home without needing a mortgage. They are rich, but they haven’t hit the millions yet. Those in this class usually have better credit scores than those that apply for conventional loans. If you fall into this category, then a jumbo loan might be the best for you.
5. Down payment on jumbo loans varies:
The down payment for a jumbo loan varies. Normally, the down payments for jumbo loans are larger than that of conventional loans, but in recent years, down payments have been going down. Previously, home buyers had to pay as much as 30% down payment for jumbo loans. But today, the down payment has reduced to as low as 10% or 15%. But you should be quite wary of low down payments on jumbo loans. A low down payment might mean that you pay higher private mortgage insurance and other fees.
As you can see from the points listed above, a jumbo loan varies from a conventional loan in various ways. If you are a veteran, a member of the US military or a spouse or widow of one, you can apply for a jumbo VA loan. The loan comes with all the benefits of a VA loan.