Buying a new home is just as stressful as it is exciting. You cannot wait to start your life in the home of your dreams, but the tedious process of getting to that stage can be overwhelming, to say the very least. However, it is a journey that every home buyer needs to take and the more you educate yourself about the process, the easier and uncomplicated it will become.
If you are planning to buy your dream home in Seattle, the very first question that might probably be on your mind is - How will I finance my home? Even if you have the answer to that one, there are so many more pieces of the puzzle that you need to get right.
For example, what kind of mortgage loan will you need? Which lender should you go to? Do you need a mortgage broker? What would be the down payment on it? Would you require a “jumbo loan”?
As real estate prices have been heading up over the past years, putting down roots in the city has gotten way more challenging. This simply translates into the fact that you are going to need a much larger loan when purchasing or refinancing a home in the Emerald City. And that’s where jumbo loans come in.
Put simply, a jumbo loan or jumbo mortgage is nothing but a mortgage loan for an amount that exceeds the industry limits of conforming loans. However, we understand that when it comes to “jumbo loans”, there are a ton of myths, misconceptions, and doubts in the minds of home buyers.
In this blog, we shall dissect whether a jumbo loan is the right way to go for you, some pros and cons of jumbo loans, and what other alternatives and loan program options you can consider. So, let’s dive right in.
Higher house prices, bigger mortgage loans
As of mid-2021 the average house price in Seattle, WA was almost $840,000. That’s up almost 9% since last year. With house listings still not coming online as fast as buyers would like, bidding wars are fierce, with the majority of homes selling in days, and for significantly over the asking price. Analysts expect this to keep pushing up property prices through the end of the year.
Added to it is the fact that more and more households may be forced to buy this year as landlords have been scared off of renting after a year of eviction bans, thus creating more demand for limited homes.
Treasury secretary Janet Yellen has also claimed that higher interest rates could be a good thing. Any switch by the Fed to start raising rates could trigger even more people to buy before they go up further.
As a result, the Seattle real estate market is in a turmoil, with record breaking inflation and rising home prices making it tougher and tougher for buyers to zero in on a home that meets all their criteria.
Whether you are thinking of refinancing your home in Seattle or buying one, you may need a bigger loan this year. So, how big should you go?
Do you need a Seattle jumbo loan?
The biggest home loans are known as jumbo mortgages, or even ‘super jumbo’ home loans.
A jumbo loan comes into play when borrowers exceed conforming loan limits. Whether or not you need one depends totally on the conforming loan limit for the year.
Let’s look into the conforming loan limits for the year 2022 and what that could mean for your potential financing decisions:
Conforming loan limits for 2022
Each year the Federal Housing Finance Agency (FHFA) sets the loan limits for traditional mortgage loans made by most banks. These are considered as ‘conforming loan’ limits (loans that conform to industry guidelines) and are higher in areas where the average house costs are higher.
For 2022, the FHFA raised the national conforming loan limits to $647,200. This means that all loans under this amount conform to the industry guidelines for this particular year. Any loan larger than this would typically be considered a jumbo loan or a jumbo mortgage.
Why You May Not Need A Jumbo Loan After All
Remember that these limits are all about the actual loan amount you need, not the purchase price of the home. So, if you can somehow manage to keep the borrowing amount below the set threshold, you are good. Therefore, the pivotal component here becomes the down payment.
For example, if you are buying an average priced home for $840,000, and make a 10% down payment, you would only need to borrow $756,000. Which will keep you under the conforming loan limit.
In fact, if you purchase a home for $970,000, and make a 20% down payment, you only need to borrow $776,000. Still keeping you under the jumbo mortgage threshold.
How Is A Jumbo Loan Different?
At the surface level, the loan amount is what typically differentiates jumbo mortgage loans from other types of home loans. However, there are also some additional differences you can expect with a jumbo versus conforming loan, given these are riskier for lenders to give out. The most common ones are availability, down payments, and the underwriting requirements. Let’s understand them all in detail:
Jumbo loans may not always be available. Due to their size mortgage amount, lenders view these loans as riskier to make. They are at greater risk by giving so much money to one borrower, and understandably so.
So, during more uncertain times, they may raise the qualification requirements for these loans, price in their higher perceived risks, or may even temporarily suspend making these loans, as they have often done with home equity lines of credit as well.
Therefore, availability becomes a huge factor even before considering getting a jumbo loan. If the market conditions are in your favor, you may be able to get a jumbo loan by meeting the minimum requirements, but in times of economic turbulence, it becomes harder to get approved for a jumbo loan.
Needless to say, jumbo loans often come with higher down payment requirements, given the risk factor involved for lenders. If you are going for a jumbo loan, you can easily expect to make a down payment of at least 10% to 20% when borrowing more than the conforming loan limit.
Therefore, the higher the loan amount, the higher would be the down payment requirements. Also, the down payment increases significantly if you are buying a second home or a multi family unit.
Ultimately, the down payment varies from lender to lender and depends on your credit score as well as the loan amount, and can be higher than 20% as well in some cases.
Given these loans are larger and the risk involved is higher, there are additional and stricter underwriting requirements for jumbo loans, including:
- Higher credit score requirements
- Second appraisals
- More assets
- Stricter DTI ratios
Alternatives To Jumbo Loans
Given how complex the application and approval process can be, a Seattle jumbo loan isn’t always the way to go for every buyer and there can be several benefits to staying below the jumbo mortgage loan amount. These are:
Faster loan processing
Better interest rates
Lower down payments
More loan program options
Given these benefits, it definitely makes sense to avoid jumbo loans, if it is possible. Therefore, if you would prefer to stay under the conforming loan limit or do not want to get into the complexities of procuring one, you have multiple other options available for you to finance your home. Also, if you have a high debt to income ratio and poor credit score, it makes sense to stay within the conforming loan limit.
It is up to you to weigh the pros and cons of jumbo loans vs those of remaining within the conforming loan limits. But, if you do consider the latter, here are your options:
Make A Larger Down Payment
Remember, it is all about the loan amount and not the price of the house you are purchasing. So, you can buy as expensive a home as you like, and providing you only borrow $776,250, you are still within the conforming loan limits. Just make up the difference with your down payment. This is a great way to still get your dream house without relying on a hefty loan amount, as long as you are able to save up for a larger down payment.
Use Multiple Loans
To avoid going over the conforming loan limit, you may choose to get two loans, and keep your main mortgage loan under the jumbo territory. For example a $776,000, 80% first mortgage, a $97,000 10% second mortgage, and a 10% down payment. Also known as a piggyback loan or 80/10/10.
Explore New Places To Buy
You may find that you can get a lot more home than you expect if you take a look at all of the Seattle suburbs and neighborhoods on offer. Some offer a lot more value and space for the money than others. Some are even choosing to go as far as Tacoma where house prices are much lower, to find even better deals.
The biggest decision you will need to make is finding a home in a location that meets your needs, while also being within your budget. You might have to go for a compromise, but it's wise to start with a list of factors that you are unwilling to settle on and then create one for stuff you can budge on. This way, you’ll be able to explore more places where you can buy your dream home.
Seattle real estate has become even more expensive, and seems likely to keep on growing - making jumbo loans inevitable. While you may need a bigger loan this year, you may not necessarily need a jumbo loan to get a great home of your own. So, it’s advisable to conduct comprehensive research before jumping to any conclusions or making the move on your mortgage loan application.
Jumbo loans are complex and nuanced, and can leave you perplexed and far more stressed than you already might have been during the home buying process. Whether or not you need a jumbo loan, get in touch with a Seattle Mortgage Broker to understand the best course of action for you.
Seattle’s Mortgage Brokers have access to wholesale interest rates from banks and other lenders, so we can often get you a better rate. We can also help you compare rates and costs from different lenders, so you can be sure you're getting the best deal possible - whether or not you end up applying for a jumbo loan. Our brokers assist you through the entire process so you can make an informed financial decision.