Everything You Should Know About Jumbo Loans in Phoenix

Are you on the hunt for a new home? Are you interested in a property located in the thriving metropolis of Phoenix, Arizona? If your answer is yes to both questions, then you are in the right place. Owning a home is an investment and with a location as compelling as Phoenix, buyers can look forward to a bright future.

Buying a home requires a lot of capital. Generally, buyers do not have enough cash to purchase a property upfront and they end up having to borrow money via a home loan. Most conventional home loans are backed by the two real estate organizations known as Fannie Mae and Freddie Mac.

But these two entities have limits on what types of mortgages they are willing to buy in the secondary market. Home prices that exceed those limits are considered jumbo loans. Buyers who are interested in larger properties or want to become real estate investors may need to secure these larger loans to afford the homes they want. Let’s get into the details of what jumbo loans are and how they can help.

Stricter Requirements

When a lender gives out a home loan, they inherit some risk. The riskier the buyer, the greater the chance they will default and cut into the lender’s profits. For this reason, lenders enforce standards for loan approval that protect them from these risks. Since jumbo loans are riskier to give out, the requirements that must be met by borrowers are much stricter.

Credit Score

If you want to secure a jumbo loan for a Phoenix home, then you will likely need a credit score of at least 700. The normal minimum for conventional loans is 620. This higher score demonstrates to lenders that you reliably pay back your debts.

Debt-to-Income Ratio

A debt-to-income ratio is a percentage that compares your monthly debt to your monthly income. Jumbo loan borrowers must have lower DTI ratios than conventional borrowers and may be required to have a maximum DTI of 36%. 

Down Payment

You can get away with a down payment as low as 3% of the total cost of the home for conventional home loans, but that won’t fly if you want a jumbo loan. Instead, you should expect to pay 20% upfront at minimum.

Higher Borrowing Capacity

The main reason to secure a jumbo loan is that you want to purchase a more expensive property in Phoenix. In 2023, the borrowing limit for a conventional loan backed by Fannie Mae and Freddie Mac is $726,200. Any loan amount above that number would be considered a jumbo loan and would require those higher standards listed above.

Jumbo loans can also be used for investment properties. If the government backs a loan, such as a VA or FHA mortgage, restrictions are placed on the type of property that can be bought. Often, one of those requirements is that the home being purchased becomes a primary residence. On the other hand, jumbo loans can be used to purchase any type of property as long as it meets the standards of your lender. 

Higher Interest Rates

Interest is a percentage of the loan amount that is paid to the lender on top of principal payments. This is how lenders make most of their money. It is also a tool that helps them reduce the risk of giving out a loan. Riskier borrowers with low credit scores tend to have higher interest rates on their loan agreements.

Jumbo loan lenders are taking on significant risks by lending large amounts of money. To offset some of this risk, they will charge higher interest rates over the life of the loan. This ensures that their losses are minimized in case of a default. The average interest rate in Phoenix for a 30-year fixed-rate loan is currently 7.31%. For similar loan terms, jumbo mortgage borrowers will likely see a rate that is slightly above that number. 

Preparing to Buy Property with a Jumbo Loan

By this point, you understand that jumbo loans are harder to secure than other types of mortgages. Since they are considered much riskier to lenders, the requirements for approval are stricter, making them accessible only to those with greater financial assets. 

The key to finding the right lender for your jumbo loan in Phoenix is thorough research. Various lenders have different requirements for approving a jumbo loan, so there is a little bit of wiggle room in the requirements based on which firm you choose. Many lenders offer free quotes so that you can get a sense of their terms and how you will cover monthly payments. Take advantage of these tools to shop around and find the right jumbo loan lender for your property purchase in Phoenix.