Due to rising home prices in many areas, it has become possible for people who are not extremely wealthy to buy a $1 million home. According to standard guidelines, a buyer should pay 20% of the home’s price upfront, meaning they would need to contribute $200,000, an amount that can take a long time to save.
The question arises as to whether it is possible to buy a $1 million house with only a 10% down payment. The answer is yes, under certain conditions. Some lenders offer such mortgages, but they typically require the borrower to have an excellent credit score, a high income, and substantial savings. Even then, the borrower may face high monthly payments.
The solution lies in a specific type of mortgage known as a jumbo loan. This guide will clarify whether you can truly buy a $1 million home with a 10% down payment using a jumbo loan.
What Is a Jumbo Loan?
A Jumbo mortgage is a type of loan designed for housing that exceeds the limit of a conventional mortgage. The limit varies by location. Once the cost of a home loan exceeds this limit, the only option available is a jumbo mortgage.
The reason behind seeking a jumbo mortgage is the risks attached with conventional mortgages as a result of having a borrowing limit. In locations with extremely high property prices, it will be difficult to go beyond the borrowing limit in conventional mortgages.
It should be noted that Jumbo mortgages are not offered by government-sponsored agencies; hence, there is more risk attached to them.
Can You Put Just 10% Down on a $1M Home?
Yes, but you have to qualify for certain kinds of jumbo mortgages to be able to do this. It should, however, be noted that such a luxury is only available to a select few borrowers. Let us consider the example below to illustrate the case.
- Cost of the property: $1,000,000
- Down payment (10 percent): $100,000
- Loan amount: $900,000
Here you will be funding most of the value of your home, and it is possible that you may be asked by the lender to purchase PMI (private mortgage insurance), among other conditions. However, several lending institutions will prefer not to ask you to buy PMI but charge a slightly higher interest rate instead.
What is the Jumbo Loan 10% Down Criteria?
This program will require much more effort on your side. You will need to prove that you can manage your expenses and cope with your payment.
Credit Score:
As a rule, your credit score must be no less than 700. In fact, a credit score under 740 may cause you some problems. Over 760 will put you at an advantage.
Debt-to-Income Ratio (DTI):
Your Debt-to-Income Ratio must be below 43%, although in most cases, it will be lower.
Cash Reserves:
Among all other criteria, your cash reserves are the most essential ones. It depends on the financial institution, but normally, you should be ready to provide 6-12 months’ worth of payments.
Income:
In addition, you will have to demonstrate your ability to generate stable income. Your employment must also be stable. Salaries are preferred over self-employment.
The Benefits of Buying with 10% Down Payment
Some benefits could make it better to put down less money.
Earlier Entry into the Marketplace:
It will take some time to save up $200,000. With a smaller down payment, you get to buy sooner and earn equity quicker.
Keeping Money Available:
Because you will not need all the extra money, you are free to do what you like with the $100,000.
Leverage Effectiveness:
Because you are using less of your own funds, you reduce the risks.
What’s the Major Cons and Risk to Consider?
Nonetheless, although it appears appealing, the plan has some drawbacks worth mentioning.
Increased Payback Amounts:
With an additional $100,000 required for borrowing ($900,000 instead of $800,000), your monthly payback amount will definitely be higher.
Extra Costs:
With PMI, you have to incur extra costs each month, or alternatively, the high interest rate can create such costs.
Limited Equity Buffer Protection:
With only a 10% margin for equity cushion, you become vulnerable to any drop in real estate values, which will make reselling and refinancing difficult.
Higher Qualification Requirements:
Qualifying for this choice will be quite difficult and entail plenty of paperwork.
Factors that Affect Jumbo Loan Interest Rate
Interest rates on jumbo mortgages vary considerably. Usually, they are higher than those on ordinary mortgages because of the additional risks they entail. There are, however, some conditions under which jumbo mortgage interest rates can become very attractive.
They are:
- Credit rating
- Size of the down payment
- Loan size
- Financial position
- Market conditions at the time of borrowing
There are some instances when individuals choose to “pay points” in an effort to reduce their interest rate on mortgages.
Other Approaches to Getting a Jumbo Loan with a 10% Down Payment
In case you are uncertain whether the above approach is effective or not, you can consider other options.
A 20% Down Payment:
Not having an insurance charge makes it very economical; however, it requires extra funds.
Piggyback Financing (80-10-10):
In this scenario, you would need to take two loans: the first one, 80%, and the second one, 10%, and then pay the remaining 10%.
Adjustable Rate Mortgages (ARM):
With low-interest rates during the initial stage of repayment, it becomes costly later.
Time and Money Savings:
By delaying your choice and saving money, you spend less in the future; however, the prices on houses will go up.
Who Might Consider Buying a $1M Home With 10% Down?
This is not a universal method, but it might be considered by some purchasers.
This option is suitable for individuals with good income levels, high credit ratings, and stable employment conditions. Besides, it might be useful in competitive markets, wherein delay might lead to higher prices.
In addition, it can also be used by investors and financially literate persons to maintain liquidity and invest their funds elsewhere.
Nonetheless, cost-conscious buyers with inconsistent incomes or lower risk-taking ability might feel uncomfortable with such a large monthly payment requirement.
Understanding with Example from a Real-Life Situation
For example, let us suppose that an individual earns an annual salary of $250,000 and has a credit rating of 760, while he/she has $200,000 in cash savings.
Approach A: 10% Down
- Down Payment: $100,000
- Cash Savings: $100,000
- More Monthly Payment
Approach B: 20% Down
- Down Payment: $200,000
- Cash Savings: $0
- Less Monthly Payment, No PMI
While Approach A offers flexibility and liquidity, Approach B decreases costs and financial risks.
Is Buying a $1M Home With 10% Down Worth It?
Yes, it is definitely possible to get a $1 million house through a jumbo loan with only a 10% down payment. Yet, the mere possibility of getting something doesn’t mean one must go for it.
The idea may be good for financially sound people who want additional leeway in achieving their plans despite a relatively high monthly payment.
Conclusion
Getting a mortgage on a $1 million property with little down payment might seem impossible at first glance. But with a jumbo loan, it can become a reality. Everything depends on your ability to cope with such an investment. Get your Jumbo loan from Reliance Financial Today!
FAQs
What should be my minimum credit score for my 10% down jumbo loan?
Most banks require customers to have a credit score of 700 or more, but in most situations, they need a higher score of 740.
Will I need to pay private mortgage insurance (PMI)?
Whether one needs PMI depends on the down payment they make. If the down payment is less than 20%, then purchasing PMI is typically required, since higher overall costs are likely due to increased risk to the lender. Some lenders may offer alternative options, but these can result in additional expenses.
How much income do I need?
The amount of income you require will depend on the total debt you have. Lenders use debt-to-income ratios to determine the suitability of their potential customers. With more income, it becomes easier for you to qualify because lenders need to make sure you are able to meet your monthly repayments.
How many cash reserves are required by lenders?
Lenders expect six to twelve months of mortgage payments as reserves. Therefore, one needs to show that he/she will still have sufficient savings or liquidity after the closing. For lenders, it means they feel comfortable because they know clients will still make payments in case of problems with finances or a change of income.
Why are jumbo loan interest rates high?
They are not necessarily high. Jumbo mortgages used to carry higher rates than standard loans. Nowadays, there is no significant difference; everything depends on the client’s credit score, the size of the down payment, and other factors.
What are the cons of making only 10% down payment?
The major disadvantage is that a person has to make higher monthly installments while owning only a small part of the property. Moreover, one risks losing money because it is extremely hard to cope with the reduced value of the property.
Is it worth taking a 10% down jumbo loan?
Yes, definitely. People who wish to save money while buying an expensive property may consider this loan option. Still, one should have a good credit standing and steady sources of income.
