Using Jumbo Mortgages to Create Investment Opportunities
Record low-interest rates and healthy activity in the housing market have created opportunities for those seeking a first or additional property. These factors have many experts asserting that buying now is a great hedge against inflation. More specifically, buying now through a home loan may be a great way to take advantage of the low-interest rates we’re seeing.
Considering a mortgage to keep your cash liquid for other investment opportunities opens the possibility of realizing both the advantages of low mortgage interest rates and potential gains from other investment vehicles. For buyers looking at homes with a high purchase price, a jumbo mortgage loan offers a way to finance your home purchase without using cash reserves.
What Is a Jumbo Mortgage?
A jumbo mortgage is a loan that exceeds the limits set by the Federal Housing Finance Agency (FHFA), and enables the (financed) purchase of homes at a higher price point for qualified buyers. Also known as a non-conforming loan, a jumbo mortgage’s limits are much higher than those of a conforming loan.
When considering a conforming or non-conforming (jumbo) mortgage, it’s important to know the amount you can finance with each this type of loan. The FHFA changes the limits for loans every year, and limits can also differ from city to city. In 2021, the maximum amount for conforming loans in many areas of the U.S is $548,250. In areas with higher costs of living — such as Hawaii, Washington, D.C., and parts of California and New York — conforming loan limits are as high as $822,375.
With this in mind, if the house you intend to purchase costs more than the maximum allowed for a conforming mortgage loan after your down payment, you may need a jumbo mortgage loan.
How Do You Secure a Jumbo Mortgage?
Unlike conforming mortgages, jumbo mortgages do not have backing from Fannie Mae and Freddie Mac, and often include higher underwriting standards. For example, you will need excellent credit — typically a score of 700 or more — to qualify. You will also need to demonstrate an acceptable debt-to-income (DTI) ratio, meaning your lender will seek to ensure your monthly income is significantly above the amount of debt obligations such as credit cards, educational loans, car payments, and other mortgages.
It is also possible (and likely) your lender will inquire about cash reserves in order to ensure mortgage payments can be covered for some period of time. Closing costs on jumbo loans may also be different from those of conforming loans, so be sure to discuss this important point with your lender.
With an understanding of the potential benefits, a jumbo mortgage at a low-interest rate may prove a solid strategy for qualified buyers to move forward with a purchase while also retaining cash.
Reaching out for help
A trusted lender can offer advice on purchase strategies and options to consider, and the steps to take before applying for a jumbo mortgage. We suggest speaking to an experienced team who understands your specific needs, and who can offer the right combination of mortgage and investment options to help you achieve your unique goals.
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