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Rising House Prices – Jumbo Loans Explained

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House prices are rising faster than experts predicted. The pandemic was to hit homeowners with shrinking home values, and the media were quick to share the news.

However, we’ve wondered what do the experts know? Property values have not taken a huge hit. Quite the opposite has occurred, and now house prices are rising faster than homebuyers can secure home loans.

In this article, we look at jumbo vs conventional loans and how they meet the needs of homebuyers today.

Current Home Market Conditions

Before we get to what’s happening right now with house prices, let’s reflect on the previous predictions for the sector due to the Coronavirus pandemic.

Zillow is the largest marketplace for real estate information in the USA, and while we like to trust their data, predictions are just that – they’re not ‘fact’, so they’re unreliable.

In May 2020 Zillow predicted a massive drop in house sales, as much as 50%, and a nationwide average drop in house price of 2-3% in 2020.

However, another expert, Lawrence Yun, of National Associations of Realtors suggested the opposite would occur, and that’s exactly what’s happened.

Fortune report on the ‘price rampage’ that really defies logic while the economy shrinks homes are selling for far more, and this is where we move onto how homebuyers can pay more to secure a home of their own.

Jumbo vs Conventional Loans

The Jumbo Loan is as the name suggests – it’s a bigger than usual home loan, and it’s in high demand as house prices continue to climb. Before we cover Jumbo loans let’s look at conventional loans as these are the most popular

Conventional Loan

A conventional home loan is typically what most homebuyers need, and its ceiling, i.e. maximum amount is around an average of $510,000 in America according to FHFA guidelines.

However, America is a big country, and the average loan amount varies from state to state. For example, a more expensive state like Washington has an average home loan amount above $700,000. At the same time, the average home sales price in Florida is less than $300,000.

There are many different types of loan products depending on the lender with most requiring buyers to put in a down payment to secure the loan.

Down payment

Lenders have varying requirements for the down payment amount. If you’ve got 20 percent of the sales price, then you won’t be stung with a PMI (private mortgage insurance).

However, house prices continue to rise and double-digit growth, i.e. grow year on year by 10% or more, is expected to continue for months. The fear of missing out sees homebuyers push up their offers to get in the home market or secure their next home.

The down payment percentage is dropping, and some lenders allow as little as three percent.

Jumbo Loans

A jumbo loan is a much bigger loan and as such borrowers need to meet stringent criteria including assessment of DTI (debt to income) ratio. Plus your credit score plays a role. While conventional loans require a credit score of 640, you’ll need 700 or more for a jumbo loan.

The borrowing costs are higher than conventional loans and also the loan interest rate.

Similarly, with a Jumbo loan, you need to present evidence to the lender that you earn more, have deeper cash reserves, and you’re able and prepared to pay more for the more considerable loan amount.

Summary

With no end in sight to rising house prices, when a conventional loan fails to deliver for you, a jumbo loan may be the answer if you meet the stringent criteria. With all financial matters, get professional advice as your circumstances are not the same as your friends or family. Do you want to read more on how to buy a home? See this article on how to use your 401(k).

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