When you are building a luxury home, or buying and renovating an existing high-end property, paying for the property can often be a cash transaction in towns such as Greenwich, Westport, Darien, and Fairfield. When this is not the case, the homeowners will likely be in a position to go for a jumbo loan. A unique class of mortgage, the jumbo loan is similar in some ways to other home-equity financial products, but there are key differences everyone should be aware of.

Jumbo Loans

What Is a Jumbo Mortgage?
The vast majority of typical mortgages are known as conforming loans. Most mortgages in the United States are purchased by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, and thus most mortgages conform to their guidelines. The most notable of these guidelines is a limit on the total amount of the mortgage, currently $417,000 in most of the country, but that number may be higher in areas with larger overall housing costs. In Fairfield County, it is currently $601,450. A jumbo loan is a mortgage valued above that guideline. Essentially, when a bank issues a jumbo loan, the bank is being exposed to more risk. That risk, in turn, is passed on to the borrower.

Do Jumbo Mortgages Have Higher Interest Rates?
As a rule, a jumbo mortgage will, in fact, have a higher interest rate than would a conforming loan. This is largely because of the sheer amount of risk a lender is exposed to by issuing the loan. If the borrower defaults for some reason, the bank may be left with a home that’s difficult to sell, which tends to drive up the cost. The spread, or difference between conforming and non-conforming loans, can vary depending on any number of factors, from Wall Street jitters to overall concern about the housing market, but the range historically is between .25% and 1.5%.

What Is the Debt-to-Income Ratio on a Jumbo Loan?
Generally, a jumbo loan will have a higher debt- to-income ratio, that is, what percentage of your monthly income will go toward paying debt, generally expressed as a front end for housing and a back end for all other debt. For example, if you spent 10% of your income on housing and 23% of your income total on paying off all debt, your debt-to-income ratio would be expressed as 10/23.

For conforming loans, a ratio of 28/43 to 33/45 is generally acceptable. For jumbo loans, however, the ratio may be much tighter because of the risk involved. Essentially, the less of your overall income that goes to debt, the more likely you are to be approved for the loan.

Will I Need a Higher Down Payment?
In all cases, a jumbo loan will require a higher down payment. Expect to pay at least 15% of the loan as a down payment for homes valued up to $1 million, and 20% for homes valued above that. In addition, you’ll need to demonstrate you have six months of payments in your account at the time of closing.

What Credit Score Will I Need for a Jumbo Mortgage?
You need a score of 700 or higher. Exceptions may be made in unique cases, but don’t rely on this happening.

In short, a jumbo loan is necessary but requires a substantial financial investment beyond the typical loan. Before inquiring, make a point to save the cash reserves you’ll need and work out the full cost; this will ensure you have a better experience buying, or building, your home.