A mortgage is considered a “jumbo loan” when the loan amount exceeds the set conforming loan limit. Conforming loans have a maximum loan amount of $510,400 in Arizona. Certain high costs locations like California, Virginia, Florida, Colorado go up to $765,600.
Jumbo loans are approved in much the same manner as standard conventional or FHA mortgages. Income and employment are verified as well as cash to close and minimum credit scores. For instance, most jumbo loans ask for a minimum score of 700 (over 90% LTV) whereas a conforming loan might have a minimum of 620. Yet beyond the difference in credit score minimums is the interest rate for such programs.
Consider a 30 year fixed rate on a conforming loan of 4.25%. A jumbo loan will have a slightly higher rate for the same 30-year term. This difference is usually around under .5% in rate. However, the amount can add up and this is why some borrowers seek ways to avoid the higher rate and PMI thorough combo 1st and 2nd loan options.
The obvious way to reduce mortgage costs is by a larger down payment to match the $510,400 loan amount. Instead of a 20% down payment, the borrower decides to make a 30% down payment which would place the loan below the conforming maximum. However, in this case, the down payment is converted from cash to homeowner equity and is no longer liquid and readily available.
Another way is to take out two loans, a first mortgage at the maximum conforming amount of $510,400 and a second to make up the difference. For example, the sales price of a home in Scottsdale is $500,000 and the buyers want to save as much cash as possible. They decide to make a 10% down payment and take out a second, subordinate loan for another 10% down keeping the first mortgage at 80% of the value of the property. Lenders refer to this structure as an “80-10-10” program. The benefit of doing this structure is the lower interest rate and avoiding mortgage insurance costs.
Naturally, there are areas where the borrowers have little choice as median home values in certain areas are higher compared to others. Buyers must buy and finance what is available. For a higher-end luxury home in Phoenix, for example, the market price for certain luxury homes can top $3+ million. There is no other option other than taking out a jumbo mortgage.
Yet for those that are in the mid-jumbo range where the sales price is closer to $600,000 to $850,000 who want to take advantage of conforming rates might decide to take the 80-10-10 option, preserving cash and keeping the rates as low as they can be. Buyers also have 5% down options when the loan amount is below $2,000,000. Learn more about all the different 95% and 90% options on the Jumbo Purchase Page.
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AZ: Phoenix, Scottsdale, Mesa, Glendale, Maricopa County, Pima County, Pinal County.