The VA Jumbo loan may be just the mortgage you are looking for. Purchasing a dream home is no easy feat. Usually, homes that are on the water, have a lot of land, or quite large are not typically within the reach of first-time buyers. Luxury homes symbolize years of hard work and determination, but as home prices continue to skyrocket, that buying a dream home has become a more difficult goal to achieve. According to Zillow, median home value in the US is $226,700. A luxury home is defined as being in the top 5% of the market. Even for homes that fall short of that benchmark, prices can be significant. Those who have great incomes and can afford a large mortgage payment, but can’t afford to purchase the home outright, will likely need to take out a jumbo loan. Unfortunately, jumbo loans can be time-consuming, costly, and difficult to receive approval for.
Don’t make the mistake of assuming that VA loans are only useful for first-time buyers or on more economical homes. VA loans are equally beneficial for eligible veterans looking to purchase an expensive home or veterans looking to renovate a home. Eligible veterans may apply for VA jumbo loans, which offer significant advantages over their conventional counterparts.
Best of all, VA loan benefits are not a one-and-done situation. Even those who have used VA loan eligibility previously may be entitled to obtain subsequent VA loans, enabling them to continually trade up in terms of home size and value.
What is a Jumbo Loan?
A loan is considered to be a jumbo loan when the amount financed exceeds the limits established by the Federal Housing Finance Agency (FHFA). Conforming loans at or below the limit can be backed or bought by US Government sponsored enterprises, such as Fannie Mae and Freddie Mac. Those above the conforming limits cannot.How Big is a Jumbo Loan?
Up more than $30,000 from the previous year, the 2019 conforming loan limits are $484,350. With some exceptions, any home loan larger than this limit is a jumbo loan.
The FHFA recognizes that certain areas of the US have considerably higher home values than on average. Conforming loan limits are adjusted in those counties based
on median home values. In extremely high cost of living areas of the US, the conforming loan limit can be as high as $721,050.
To determine what the conforming loan limits are for your county, visit the FHFA’s Conforming Loan Limit Map.
Disadvantages of a Conventional Jumbo Loan
Loans that exceed conforming limits are deemed too risky and expensive to be guaranteed by or sold to entities such as Fannie Mae or Freddie Mac. This places the lender at a much greater financial risk should the borrower default on the loan. Therefore, jumbo loans have much stricter criteria and can be more difficult to qualify for. Borrowers may need:
· Excellent credit scores
· Very low debt-to-income ratios
· Cash for large down payments
· To pay increased closing costs
· Additional documentation, paperwork, and time to complete the process
· Private Mortgage Insurance (PMI)
Advantages of a VA Jumbo Loan
The VA jumbo loan works a little differently from conventional jumbo loans.
For conventional jumbo loans, there is no Government-sponsored enterprise providing financial guarantees for the loans. Therefore, the financial risk lies solely with the lender.
In the case of VA loans, the VA will guarantee up to 25% of the value of the loan so long as it falls within conforming loan limits. Because the VA provides such a large guarantee on the loan, there is less risk for the lender. The guarantee also allows eligible veteran borrowers to purchase homes without having to worry about coming up with enough cash for a down payment.
Unfortunately, for loans above the conforming limit, the VA will not guarantee 25% of the total loan. The good news is that unlike conventional jumbo loans, veterans still have an option to use their VA loan eligibility to at least have a portion of their VA jumbo loan guaranteed.
Conforming VA Loan Example
Let’s say that a veteran obtains a loan that exactly matches the current conforming loan limit of $484,350. The amount of the loan guaranteed by the VA will be 25% of that amount.
$484,350 (loan amount) x 25% = $121,087.50 (VA guarantee amount)
In this case, the veteran will not be required to make a down payment as the loan meets conforming limits and a full 25% has been guaranteed.
However, when a VA jumbo loan is needed, the veteran borrower will be required to make up the difference between how much the VA guarantees and what would be equal to 25% of the loan’s value.
VA Jumbo Loan Example
If the jumbo loan amount is $584,350, that is exactly $100,000 more than the conforming limit. The VA will still provide a guarantee up to the maximum conforming loan limit, or $121,087.50, and nothing for the additional $100,000.
$584,350 (loan amount) x 25% = $146,987.50 (25% of loan)
$146,987.50 (25% of loan) – $121,087.50 (VA guarantee) =
$25,000 (Deposit)
In the jumbo VA loan example, the veteran borrower must make a down payment equal to 25% the $100,000 that is over the conforming limit.
Although a down payment is required with a VA jumbo loan, it is likely to be a much lower down payment than what is required with a traditional jumbo loan.
Conventional Jumbo Loan Example
A conventional jumbo loan may require a down payment equal to 20% of the total loan.
$584,350 (loan amount) x 20% = $116,870 (down payment)
Using the above example for a 20% down payment, $116,870 would be required, $91,870 higher than a VA jumbo loan.
The effective down payment on the VA jumbo loan in this scenario would be just 4.28%
Some lenders have come to the realization that borrowers in a financial position to qualify for jumbo loans may actually be less of risk than conforming loan borrowers. In some cases, a 20% down payment may not be required, but that’s when private mortgage insurance might come into play.
Private Mortgage Insurance
When home loan borrowers aren’t able to come up with enough funds to make a 20% down payment on their home, lenders generally require they purchase Private Mortgage Insurance or PMI. This insurance helps the lender recover losses incurred should the property go into foreclosure. Whether or not PMI will be required for a conventional jumbo loan is at the discretion of the lender.
PMI does nothing for the borrower except add additional cost to the loan. PMI premiums typically cost between 0.5-1.5% of the loan. Lenders usually require PMI until the amount of the mortgage has been paid down to 78% of the initial appraised value. PMI costs over the life of the loan can be significant.
Yet another advantage with VA jumbo loans is that PMI is not required. Even with the above example where the effective down payment for a VA jumbo loan is a low 4.28%, no PMI premiums will be added to the monthly payment.
VA Funding Fees
The VA does charge borrowers a funding fee. This fee is a varying percentage of the loan amount. How much the fee will be is based on the loan type and category of the eligible member and can be found on the Department of Veterans Affairs website.
While this is a significant amount, certain categories of veterans may be exempt. The VA states that the following veterans do not have to pay the funding fee:
· Veterans receiving VA compensation for a service-connected disability
· Veterans who would be entitled to receive compensation for a service-connected disability if they did not receive retirement or active duty pay
· Surviving spouses of Veterans who died in service or from a service-connected disability
Funding fees can range from .5% for an Interest Rate Reduction Refinance Loan (IRRRL) to 3.3% when using VA eligibility a second time on a zero-down home loan. Veterans who qualify for an exemption will save considerably with a VA jumbo loan.
Fee Protection
Only reasonable closing costs can be charged by the lender when obtaining any VA loan. The VA stipulates which fees are and are not allowed, helping to reduce closing costs incurred by the borrower. Some allowable fees include:
· Loan origination fees
· Appraisal fees
· Credit reports
· Discount points
· Title search and insurance
· Recording fees
The VA also allows closing costs to be paid by the seller.
Non-allowed fees include:
· Loan application fees
· Notary charges
· Document preparation fees
· Escrow fees
· Settlement Fees
· Interest rate lock fees
Lenders may not penalize VA borrowers for paying loans off early.
VA Jumbo Loan Rates
The VA does not set VA loan interest rates. Rates and points are determined by the lender. However, because the Veterans Administration guarantees VA loans, VA jumbo loan rates are generally lower than rates for conventional jumbo loans.
Final Thoughts
VA loan eligibility is one of the benefits that have been earned by those who have served. Eligible veterans in need of a jumbo loan for their next home purchase are smart to consider all of the benefits a VA jumbo loan can provide.
When compared to a conventional jumbo loan, a VA jumbo loan allows veterans to put down a significantly smaller down payment, have lower closing costs, and save money through reduced interest rates and no PMI premiums over the life of the loan. As a Veteran, you will experience a much easier process to purchase a home loan that exceeds the conforming loan limits. For more information on VA Jumbo loans call (855) 956-4040.
Article By Melissa Lagerquist