The downside for homebuyers is the risk that their income won't keep pace with those increasing mortgage payments. In that case, they might find themselves stretched too thin and even have to sell the home.
As a general rule of thumb, you can expect to make a down payment of at least 10% on your jumbo loan. Some lenders may require a minimum down payment of 25%, or even 30%. While a 20% down payment is a good benchmark, it's always best to talk to your lender about all options.
Requirements vary by lender, but you'll need to demonstrate a stronger financial profile to qualify for a 2/1 buydown mortgage. This typically means having a high credit score, good income, low debt-to-income (DTI) ratio, and the ability to make a larger down payment compared to traditional mortgages.
1. Max debt-to-income ratio (DTI) for jumbo loans is usually 43% Your DTI is the percentage of your monthly earnings used to pay off all debt obligations and it's used by lenders to determine how large of a monthly mortgage payment you can handle.
Bottom line. Like any conventional wisdom, the 28/36 rule is only a guideline, not a decree. It can help determine how much of a house you can afford, but everyone's circumstances are different and lenders consider a variety of factors.
On a $90,000 salary, you could potentially afford a house worth between $280,000 to $320,000, depending on your specific financial situation. This range assumes you have a good credit score and manageable existing debts.
To subsidize the borrower's reduced monthly payments, it typically costs a percentage of the total loan amount to reduce the interest rate. For example, on a $500,000 loan with a 6% contracted interest rate, the total cost of the buydown for the first and second year would be about 2.2% of the loan amount.
This structure makes homeownership more affordable in the early years, especially for first-time homebuyers or those stretching their budget to buy a larger home. The upfront savings during the first two years can help cover other expenses like furniture, renovations, or moving costs.
One common question borrowers have is, “Can you refinance after a 2-1 buydown?” The answer is yes; refinancing is possible and can be a beneficial option for many borrowers.
Typically, jumbo loan rates are higher than conventional loan rates. Since jumbo loans carry higher loan amounts and pose higher risks to lenders, they often come with higher interest rates. Additionally, jumbo loans may require larger down payments and stricter qualification criteria compared to conventional loans.
A “piggyback” second mortgage is a home equity loan or home equity line of credit (HELOC) that is made at the same time as your main mortgage. Its purpose is to allow borrowers with low down payment savings to borrow additional money in order to qualify for a main mortgage without paying for private mortgage insurance.
Most lenders require that you purchase private mortgage insurance (PMI) if your down payment is less than 20%. This insurance, which typically runs about 0.5 to 1.5% of your loan amount per year, is designed to protect the lender's investment in your home, signaling your commitment to the purchase.
While those three years of smaller payments with a 3-2-1 buydown look pretty nice, don't forget that you're paying for them in advance. Again, it's just like a $20 discount you paid $20 to earn. And if you do go down that road, you'll be missing out on saving thousands in the long run.
The party funding the buydown, whether it is the seller, builder or buyer, kicks in enough money to reduce the buyer's mortgage rate by 2% the first year and 1% the second year as part of that party's closing costs. The mortgage carries the standard rate and payment in years 3-30.
A 3-2-1 temporary buydown can reduce a homebuyer's interest rate for three years and will lower the rate by 3% the first year, 2% the second year and 1% the third year. After the third year, the rate will remain the same for the loan term.
A 3-2-1 buydown mortgage defined
It gets its name from the variable rate of reduction during those first three years: 3% for the first year of financing, 2% for the second, and 1% for the third (and final) year of reduced-rate payments. From the fourth year onwards, you'll pay the full interest rate.
Temporary Interest Rate Buy Down: Borrowers, sellers, builders or lenders may pay/offer buy downs for fixed rate mortgages for 1-4 unit properties (not permitted for ARMs), however, FHA no longer permits underwriting at the bought down rate; the borrower must qualify at the full note rate.
Qualified borrowers could see a monthly mortgage payment of principal and interest between $3,043.80 and $4,029.80 for a $600,000 mortgage loan right now.
Not all lenders offer mortgage buydowns and terms vary. In addition, you still need to qualify for the home loan based on the full interest rate. The largest mortgage provider in the U.S., Rocket Mortgage offers 30-year fixed, jumbo, VA and FHA loans with two or more discount points available.
Consider the following example for a 30-year loan: On a $100,000 mortgage with an interest rate of 3%, your monthly payment for principal and interest would be $421 per month. If you purchase three discount points, your interest rate might be 2.25%, which puts your monthly payment at $382 per month.
To comfortably afford a $600k mortgage, you'll likely need an annual income between $150,000 to $200,000, depending on your specific financial situation and the terms of your mortgage. Remember, just because you can qualify for a loan doesn't mean you should stretch your budget to the maximum.
The 28/36 rule
It suggests limiting your mortgage costs to 28% of your gross monthly income and keeping your total debt payments, including your mortgage, car loans, student loans, credit card debt and any other debts, below 36%.