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What Retirees Should Consider Before Applying for a Jumbo Loan

Taking out a new loan isnق€™t something people look forward to during retirement, but sometimes life calls for one. When youق€™re unable to pay off your conventional home loan before you retire, it can become a heavy financial burden for you and your family. This is what leads people to refinance their mortgages, so that they can lower the monthly payment to something more affordable. Some people decide to take out a second loan on other properties, like rental, vacation and retirement homes. A lot of retirees are turning to jumbo loans to help them get out of high financial obligations. If youق€™re looking to do the same, here are a few things you should consider before taking out a jumbo loan.

Make Sure You Can Afford the Monthly Payments

As a retiree, youق€™re likely on a fixed income, which means that you have to stay within a specific budget. It only makes sense to ensure that your new monthly payment with the jumbo loan is going to be something that youق€™re able to afford. Donق€™t overlook other expenses that you may have, such as unexpected events, medical emergencies and so on. If your property has HOA fees and property taxes, donق€™t forget to factor these in as well.

Donق€™t Forget About Your Retirement Goals

Likely, you have goals that you want to achieve after you have become retired, but this is sometimes hindered by financial obligations. Itق€™s important that you look at your retirement lifestyle choices, like where you plan to travel, paying for kidsق€™ or grandkidsق€™ college or being able to buy gifts for family members for birthdays and holidays. Knowing what you want to spend your money on after retirement can help you determine how much you have available each month to spare. You donق€™t want the jumbo loan eating into your funds.

Check Your Credit Score Before You Apply

Like with any loan, your credit score is very important. Make sure to request a copy of your credit report, so that you can see if you have blemishes on there that is bringing down your credit rating, which could in turn get your loan application denied. In the event that you do get approved with a low score, itق€™s very likely that you will be given a much higher interest rate from the lender. You can request a copy of your report for free from the IRS or obtain it online for a monthly fee. Dispute anything that doesnق€™t belong and pay off debts that you can to bring up your score before applying.

Jumbo Loans Tend to Have High Interest Rates

Compared to other loans, jumbo mortgages tend to have higher interest rates. This is due to them being riskier than other home loans. People who take out these loans are taking out more than $425,000, which means that banks are typically forced to keep them on their financial books, even though people are more likely to default on them. So donق€™t think of this as a conforming loan, because it is highly likely that you will have a slightly higher interest rate. As an example, a conforming loan may have a 4.14 interest rate, while a jumbo loan may have a 4.32 interest rate.

Stiffer Requirements and Larger Down Payments

As mentioned, jumbo loans are considered a higher risk. Because of this, you are going to be faced with having to pay a bigger lump sum for the down payment. Previously, lenders allowed borrowers to put down 5 percent, but today, the down payment starts at 20 percent of the propertyق€™s equity. In some cases, folks have been asked to put down between 25 and 30 percent. The requirements are also very strict, such as providing sufficient proof of your income. The lender will also check your debt-to-income ratio to determine if it exceeds 38 percent (includes youق€™re expected monthly mortgage payment), and whether you have good credit.

If you still feel like you are a good candidate for a jumbo loan, then you can find a variety of lenders who can give you one. Do not overlook these considerations because you could end up getting declined or being placed in a financial bind.