An Overview of Jumbo Mortgages
Jumbo Mortgage Definition: A “jumbo” mortgage is a mortgage in an amount higher than their preferred maximum. Your average bank has a range of mortgage sizes in which it prefers to stay. In Canada, there are some lenders who view a “jumbo” loan as anything higher than $600,000, while other lenders classify a jumbo as anything higher than $1 million. (Jumbo Mortgage Definition)
What Is Jumbo Mortgage
Each lender has its own rules and guidelines that govern its practices. One part of these guidelines is the limits that they place on their lending, and just about every lender has a minimum and a maximum mortgage amount in which they will work. However, not all lenders use the same calculation methods for determining their maximums and minimums. You might run into a lender that has a cap of $1.5 million, but they might also have a sliding scale when it comes to calculating the loan to value ratio on a loan. They might permit 90% for the first $700,000, 80% for the next $200,000 and 60% for the rest.
Even then, these limits don’t always give an accurate description of what you can get from a lender. Each lender has its own requirements, and the guidelines often have more flexibility with different potential borrowers, depending on the credit score, credit history, available assets and other variables. Amansad Financial has connections with a variety of mortgage lenders in western Canada who will work with jumbo loans, and making the right choice really depends on the ins and outs of your own situation.
One advantage of taking out a jumbo loan in Canada is that the available interest rates aren’t higher than those for traditionally sized mortgages. In the USA, the rates for a jumbo loan are usually higher, even if your credit and income history are pristine. However, you are going to have to wait longer for approval, because a jumbo application goes through a “jumbo” amount of scrutiny by the lender.
Monster Mortgages in Canada
If you think about it, this makes sense. When a bank takes on a mortgage of unusually large size, it is taking on more risk. Each bank, mortgage brokerage or other lender works with a default rate. This means that every lender knows the exact amount of money that is in arrears at any given time. They also know how much money has gone out the door because of foreclosures they have had to execute as well as short sales and other circumstances that are less than ideal. If a lender has a default rate of 5 percent (1 person out of twenty goes into default on his mortgage), that means that if the lender gives out $10 million in loans over 100 people, 5 of those mortgages would go into default, and if the average loan is $100,000, that means that only $500,000 out of $10 million is the potential loss. However, if they give out one jumbo loan for $1 million and that one person defaults, that is $1 million out the door. This is an extremely simplistic presentation, but the name of the game for lenders is diversification of risk. That means that a larger pool of mortgages, with more borrowers, means that the lenders have less risk, because each borrower’s likelihood of default is fairly small. However, putting a bunch of dollars into one particular loan is an exposure to risk, and so the lender will be extremely careful before making that approval.
If you can’t find a bank that will approve your jumbo mortgage, but you also have 30 or 40 percent to put down, a private lender is not out of the question. Amansad Financial has connections with a whole network of individuals and companies that like to invest their money in real estate through funding mortgages on a private basis. They’ll get a higher interest rate than the banks, but the fact that people tend to default on their mortgages only as a last resort means that the likelihood of their making a profit is still very high.
If you think that a jumbo mortgage is in your future, talk to one of our specialists at Amansad Financial. Our connections among traditional lenders as well as private lending sources are numerous enough to ensure that you will find the right deal to suit your needs. We look forward to helping you find the loan for the home of your dreams!
If you want conventional financing on a mortgage for your home without having to pay private mortgage insurance (PMI) premiums, then you have to put down at least 20 percent of the purchase price of your home when dealing with a bank or other traditional lender. So if you’re buying a home with a purchase of price of $600,000, you would need to put down at least $120,000 in order to avoid those premiums.
Benefits of a Large Down Payment on Your Mortgage
Can you get mortgage approval with a smaller down payment? Yes, but you will be shelling out more money for the life of the loan. Not only will you be paying those premiums, but you’ll also have a higher cost of financing, as you’re borrowing more money. That means you have more principal to pay back — and more interest expense to pay back as well. Over time, this means that if you can make a larger down payment, you will have smaller monthly payments. If you are wise when choosing your home, that will also give you more cushion in your budget to make extra payments and end up owning the house free and clear sooner.
What is private mortgage insurance? Basically, it’s coverage protecting your lender in case you can’t make the mortgage payments and the lender ends up having to foreclose. At the sale, if the bank ends up losing money by selling the house for less than what you owed on it at the time of foreclosure, then the private mortgage insurance policy covers the difference. However, the bank doesn’t pay these premiums — it makes you pay them, even though you don’t benefit if the house goes into foreclosure. Getting a higher down payment keeps you from having to fund this policy.
However, there are other benefits to making a down payment of at least 20 percent for your home purchase. One is easier approval from the bank. If you have 20 percent to put down on a house, that shows the bank that you have the capacity to earn at a high enough level to save for a sustained amount of time — and the discipline to sock money away over time until you have a large enough amount to put that much down. Even if your credit score is a little lower in the 600s, if you can put 20 percent down you can still get competitive interest rates from some banks.
The interest rate is one of the most important numbers associated with your home purchase — even more important than the purchase price, in some cases. Even a difference of half a percentage point can mean a difference of thousands or tens of thousands of dollars over the life of a mortgage, depending on the size of the loan. The more you can put down, the less risk you are asking the lender to take with your mortgage. Obviously, your credit score plays a role here as well, but getting a high down payment can make a big difference here as well.
If you make a large down payment, you can be done with the mortgage sooner. While most mortgages in Canada are amortized over periods between 15 and 30 years, if you’re putting more down, you’re more likely to be able to make extra payments through the life of the mortgage, bringing down your principal and taking your balance down closer to zero sooner.
The last benefit of a large down payment is protection from negative equity, or being “upside down” in a mortgage. Let’s say you buy an $800,000 home, but you only but 8 percent down, so $64,000, taking out a loan of $736,000. However, a year or two later, the housing market in your city takes a major nosedive, and now your house appraises for $650,000. You have been making your mortgage payments in a timely manner, but you haven’t been making extra payments, and you only took out a two-year loan originally. You can end up owing more on the house than it’s worth, making renewal of that mortgage a dicey proposition. Cement your equity in your house by making a large enough down payment to weather fluctuations in the housing market.
it’s true that you can make more money investing in the stock market and in other vehicles, if the market goes your way. However, as you can see, putting 20 percent down on your house has a number of financial benefits, and putting even more down gives you even more security. Talk to your mortgage professional about the best course for you and your family.