What the heck are jumbo construction loans?
Do I qualify for a one time close construction loan or a jumbo loan to finance the cost of new construction?
A jumbo construction loan is a type of loan designed to finance the construction of a larger, more expensive new home, often referred to as a “jumbo” due to its higher value.
Jumbo loans are generally used for properties that exceed the conforming loan limits set by government-sponsored entities like Fannie Mae and Freddie Mac.
Okay, let’s dissect what a jumbo construction loan is, and why it might just be your best bet right now.
Table of Contents
What are Jumbo Construction Loans?
A construction loan becomes “jumbo” when it surpasses the loan limits set by Fannie Mae and Freddie Mac – this varies widely by state and county in the U.S.
For example, the current jumbo loan limit in Texas is $726,200 and $1,089,300 for California (any loan above these amounts is considered to be “jumbo”).
Just remember that when you hear your loan officer refer to a ‘jumbo construction loan‘, they’re talking about a loan that’s above the conforming loan limit.
A jumbo loan for new construction allows borrowers to finance the construction of a larger or more opulent home without substantial out-of-pocket expenses.
However, jumbo loans generally entail stricter credit requirements, higher interest rates, and larger down payments.
Jumbo Construction to Permanent Loan: How Does It Work?
A jumbo construction loan functions like an oversized piggy bank, safeguarding your dream of erecting a lavish home right from ground zero.
Here’s how it works:
First, the ‘borrower‘ applies for the loan, getting pre-qualification based on credit history, income, and debt-to-income ratio.
Once approved, the construction phase commences, where the borrower pays interest-only payments on the funds disbursed.
This ‘loan program‘ typically lasts 6 to 12 months.
Upon completion of the construction, the loan converts to a standard mortgage.
This is where the borrower begins full repayments of principal and interest.
The ‘loans work‘ in a way that allows flexibility and breathing space during construction.
It’s essential to note that jumbo construction loans are unique in that they are riskier for lenders due to their size.
Therefore, they often require a more substantial down payment (up to 20-30%) and a higher credit score compared to conventional loans.
For a comprehensive view on this topic, Bankrate offers an insightful resource on jumbo loans.
Do I Qualify for a Jumbo Construction Loan?
Eligibility criteria for jumbo construction loans can vary among lenders, but here are some common factors that lenders consider:
- Credit Score: A strong credit history and credit score are often required for jumbo construction loans. Generally, a credit score of 700 or higher is preferred, but some lenders may have stricter requirements.
- Income and Debt-to-Income Ratio (DTI): Lenders will assess your income to ensure that you have the financial capacity to repay the loan. A lower debt-to-income ratio (usually below 43%) is generally preferred to demonstrate that your existing debts are manageable.
- Down Payment: Jumbo construction loans typically require a larger down payment compared to conventional loans. This can range from 20% to 30% or more of the total project cost.
- Project Details: Lenders will review the construction plans, cost estimates, and timelines for the project. A clear and well-documented plan is important for demonstrating the feasibility of the project.
- Builder and Contractor: Lenders may require that you work with reputable builders or contractors who have a track record of successful construction projects. The builder’s qualifications and experience are important factors.
- Property Value: The value of the completed home should justify the loan amount. Lenders will assess the appraised value of the property to ensure it aligns with the loan size.
- Reserve Funds: Lenders might require you to have additional funds set aside as reserves to cover unexpected costs during construction or to serve as a safety net.
- Documentation: Prepare to provide thorough documentation, including tax returns, proof of income, construction plans, builder information, and any other documents requested by the lender.
- Experience: Some lenders may prefer borrowers with experience in real estate and construction, especially if they are acting as their own general contractors.
- Credit History: Your credit history should show a responsible borrowing track record and minimal negative marks. Lenders will evaluate your credit report for any red flags.
- Legal Requirements: You’ll need to meet all legal requirements for building in your chosen location, including permits and zoning regulations.
How Do Interest Rates Compare for Jumbo Construction Loans?
When you think about interest rates, common options like FHA loans, conventional loans, VA loans and USDA loans probably come to mind.
Ordinarily, you might run into interest rates of 3-7% with these loans.
But jumbo construction loans in a high interest rate environment tend to carry higher interest rates, roughly in the region of 5-10%.
This disparity is largely due to these loans covering construction, lot, and permanent mortgage financing, thus a slight increase in interest is to be expected.
Basic Eligibility Criteria for Jumbo Construction Loans
If you’re serious about getting a jumbo construction loan, you’ll need to adhere to stringent loan requirements:
- Stable Income: A predictable and stable income is crucial, proving to lenders that you’re able to manage the hefty loan repayments.
- Strong Credit Score: A solid credit score is non-negotiable; most lenders prefer a score above 700.
- Low Debt-to-Income ratio (DTI): Lenders consider your DTI to assess your ability to manage monthly payments.
- Down Payment: Usually, a substantial down payment of 20% or more is required to ensure your commitment towards the loan.
- Appraisal: An accurate, comprehensive appraisal supporting the loan’s value is mandatory.
To assess these aspects, lenders will usually ask you to get pre-approved and apply for a construction loan, requiring documents such as your latest bank statements, income tax returns, proof of income and assets, etc.
| Key Eligibility Criteria | Jumbo Construction Loan Guidelines |
|---|---|
| Stable Income | Must be steady and predictable |
| Credit Score | 700 and above preferred |
| DTI | Predictive of your ability to manage repayments |
| Down Payment | 20% or more usually required, 10% could be possible |
| Appraisal | Supports the value of your loan |
Conclusion & Wrap-Up
We’ve seen that jumbo construction loans can be the game-changer you need if you’re planning on building a new home in 2023.
These unique financing options can make your dream home a reality without requiring you to cough up the whole construction cost upfront.
So what makes these loans so special?
Well, they hand you the reins of the construction process.
Instead of you buying a premade new construction home, you’re the one overseeing everything from the pick of land to the color of your kitchen countertops.
However, it’s important to remember that jumbo construction loans are, in a word, jumbo.
They’re designed to finance properties with values excess of the average – over $726,200 for areas like Texas, and around $1,089,300 for high-cost-of-living areas like California.
This makes them great for luxury homes or homes in expensive neighborhoods, but might be overkill if you’re looking for something more modestly priced.
In conclusion, as you prepare to build your brand new home in 2023, remember that jumbo construction loans offer you an option of creating from scratch the dwelling of your dreams.
Jumbo Construction Loans: Frequently Asked Questions (FAQs)
#1. What is a Jumbo Construction loan?
A Jumbo construction loan is a mortgage loan with a higher borrowing limit than the traditional loans, which is used to finance the construction of a home. This type of loan is designed for borrowers who want to build an expensive home, or for those who are in expensive housing markets.
#2. What sets Jumbo construction loans apart from traditional loans?
The primary difference is the amount that can be borrowed. Jumbo construction loans exceed the Federal Housing Finance Agency (FHFA) loan limits, traditionally offering larger amounts of cash outlay than conforming loans.
#3. How do I qualify for a Jumbo construction loan?
Qualifying for a jumbo construction loan generally requires a credit score of a minimum of 700, a debt-to-income ratio below 40-43%, along with a larger down payment—typically 20-30%, and money in reserve after closing.
#4. How does the repayment process for a Jumbo Construction loan work?
Typically, during construction the borrower pays interest-only, then, upon completion of the property, the loan can be converted into a traditional 15 or 30-year mortgage.
#5. What is the interest rate on a Jumbo Construction loan?
Interest rates on jumbo construction loans can vary and are typically higher than traditional mortgage rates. The actual rate depends on several factors including lender’s policies, borrower’s credit score and the loan amount.
#6. Can I refinance a Jumbo Construction loan?
Yes, after the home is constructed, you can refinance a jumbo construction loan into a traditional mortgage if you wish to do so.
#7. What are the risks associated with a Jumbo Construction loan?
The main risks include finishing the construction on time and within budget as any variation may lead to higher expenses. Also, due to higher loan amounts, the risk of default is greater for the lender and thus these loans have stringent approval criteria.
#8. Can I use a Jumbo Construction loan to renovate my existing house?
Yes, some forms of jumbo construction loans, commonly known as “renovation loans,” can be used to finance major renovations to an existing property.
#9. Can a Jumbo Construction loan be used to buy land?
Yes, most jumbo construction loans cover the cost of the land, construction, and sometimes soft costs such as permit fees, architectural services, etc.
#10. Who would benefit most from a Jumbo Construction loan?
Jumbo construction loans are best suited for prospective homeowners who have robust financials and are looking to construct a highly custom or high-cost property in an expensive housing market.
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About the Author
Brian Reese is a senior advisor and co-owner at District Lending. He is one of the world’s leading experts in veteran benefits, having helped millions of veterans secure their financial future since 2013. Brian is the founder VA Claims Insider, an education-based Coaching & Consulting company whose mission is to educate and empower veterans to get the VA disability benefits they’ve earned for their honorable service. A former active-duty air force officer, Brian deployed to Afghanistan in support of Operation Enduring Freedom. He is a distinguished graduate of management of the United States Air Force Academy and earned his MBA as a National Honor Scholar from the Spears School of Business at Oklahoma State University.
