For many individuals and families, owning a home is a lifelong dream. However, with rising real estate prices, some may find themselves seeking financing beyond the conforming loan limit. This is where jumbo loans come into play.
What is a jumbo loan?
What exactly is a jumbo loan in Alabama? A jumbo loan is a specialized type of mortgage that comes into play when you’re seeking financing for a home that surpasses the conforming loan limits (CLL) established by the Federal Housing Finance Agency (FHFA). Typically, this type of loan is necessary for upscale, luxurious properties or those situated in pricey housing markets.
If the loan amount needed to buy the home is more than the conforming loan limit, you’ll need a jumbo loan. But because of the larger loan amounts and increased risk for lenders, Alabama jumbo loans often come with higher interest rates and stricter requirements than conventional loans. For instance, a larger down payment and a higher credit score may be required to qualify for a jumbo loan.
What is the jumbo loan limit in Alabama?
In Alabama, the conforming loan limit is $726,200 across all counties. For example, if you’re buying a home in Jefferson County, where the median sale price is $290,000, a loan limit exceeding $726,200 would be considered a jumbo mortgage.
As a reminder, the loan amount is what determines whether or not you’ll need a jumbo loan, not the price of the home you’re buying. So, if you were to put $100,000 down on a $780,000 home in Birmingham, the loan would be $680,000, which is under the conforming loan limit for this area. In this case, your loan wouldn’t be considered a jumbo loan.
Additional information regarding the conforming loan limits in Alabama can be found here.
What are the requirements for a jumbo loan in Alabama?
The requirements to qualify for a jumbo loan are more stringent than the requirements for a conforming loan. The specific requirements can vary from lender to lender, but below are the typical requirements for borrowers seeking a jumbo loan in Alabama.
Higher credit score: To qualify for a jumbo mortgage, borrowers typically need to have a credit score of at least 720. However, some lenders may be willing to accept scores as low as 660, although less frequently. A higher credit score demonstrates a borrower’s ability to manage credit responsibly and is an important factor that lenders evaluate when considering jumbo loan applications.
Larger down payment: Buying a high-priced home usually requires a larger down payment from the buyer. Conventional loans may offer programs for down payments as low as 3%- 5%, but non-conforming loans require a minimum down payment of 10%, with some lenders requiring up to 30%. If the homebuyer puts down less than 20%, they will likely need to pay for private mortgage insurance (PMI).
More assets: Jumbo loan borrowers are typically required to have additional assets. In particular, lenders may require borrowers to demonstrate sufficient liquid assets or savings to cover one year’s worth of loan payments.
Lower debt-to-income ratio (DTI): A mortgage lender will look at a borrower’s DTI (debt-to-income ratio) to assess their creditworthiness and spending habits. For a conforming loan, a DTI as high as 50% may be acceptable to some lenders. However, jumbo loan borrowers are required to have a lower DTI, ideally under 43% and closer to 36%. This is because jumbo loans are riskier for lenders due to the larger loan amounts. Applicants with a higher DTI may still qualify for a jumbo loan, but it could result in a higher interest rate or a stricter approval process.
Additional home appraisals: A mortgage lender may require a second home appraisal for a jumbo loan, in addition to the standard appraisal, to get another opinion on the property’s value. This is especially true in places with limited comparable property sales. The second appraisal helps lenders ensure that they are providing funds for a property that is worth the loan amount or more.
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