A jumbo loan is any mortgage with a balance higher than the standard conforming amount. Today, this means any loan higher than $424,100. That’s the maximum loan amount for a standard, conforming loan. It’s also the maximum for many government-backed loans. Anything beyond that requires a different loan program. Generally, it means a private lender must fund the loan. If you are in this situation, you should know what to expect.
Tougher Underwriting Guidelines
It makes sense – you borrow more, you undergo more scrutiny. There’s more to the story, though. Fannie Mae probably won’t buy the jumbo loan. Instead, a private lender sells it to individual investors in the market. Sometimes investors can be hard to find, especially if the loan is risky. Rather than take a chance, lenders tighten the guidelines for loans over $424,100.
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Higher Credit Scores
Your credit score plays a large role in the jumbo loan process. If you have a score lower than 740, expect some level of resistance. A score of 740 or higher shows lenders you are financially responsible. You probably don’t have any late payments in the last few years. You also probably manage your credit with ease. You don’t overextend yourself and you make your payments on time. These habits get you further with lenders. They see you are able to handle your finances and are more likely to loan you a large mortgage loan.
Lower Debt Ratio
There aren’t maximum debt ratios set in stone for the jumbo mortgage. Again, it’s up to each lender. Usually, lower debt ratios mean a higher chance of approval, though. Don’t assume your low debt ratio is enough, though. Lenders also like to see ample discretionary income. This means you have money left after you pay your monthly bills. This allows you to live comfortably. It may also allow you to build up an emergency fund. You can then rely on these funds during a financial emergency or if you lost your income.
Higher Amount of Reserves
Reserves are money set aside to pay your mortgage should your income stop. Lenders count the reserves based on how many months of payments they cover. Here’s an example:
- Monthly mortgage payment with taxes and insurance = $2,500
- Amount of savings = $10,000
You have 4 months of reserves on hand because $10,000 covers 4 months’ worth of payments. The more reserves you have, the higher your chances of approval on a jumbo loan.
Higher Down Payment
It’s not enough to have reserves, though. You also need a high down payment. You probably won’t find lenders willing to loan 95% of the value of a home on a jumbo loan. Instead, you should aim for a down payment of at least 20%. This gives you a significant investment in the home. For example, let’s say you purchase a $500,000 home. If you put down 20%, it equals $100,000. That’s a lot of money. Chances are you will do what you can to make sure you stay on time with your mortgage payments.
Lenders call this “skin in the game.” The more of your own money you have invested, the better chances you have of approval. It shows the lender that you are invested in the real estate. You aren’t just taking out a large loan only to walk away from the investment shortly thereafter. Expensive homes are often harder for banks to sell off in foreclosure. They use the higher down payment as “insurance.”
More Scrutiny of Your Income
You’ll need a solid 2-year employment/income history for a jumbo loan. Lenders will need plenty of documentation regarding your income. For example, if you are self-employed, you’ll need at least 2 years of tax returns. The returns should show not only a profit, but a steady increase from the previous year. If your income declined from one year to the next, qualifying may be difficult. It could show the lender a downward trend, which they don’t want to risk with such a large loan.
Your income should be straightforward too. Income that you can’t fully verify with the exception of your bank statements won’t suffice. Lenders need to see that you receive the income consistently and that it will continue. Just looking at bank statements doesn’t show lenders any details of your income. The more details you can provide, the better.
Alternatives to the Jumbo Loan
There is a way to get around the need for a jumbo loan. If your loan amount is slightly higher than the conforming limit, you can take out 2 loans. The first mortgage would maximize the conforming limit of $424,100. The 2nd would be a home equity loan for the remainder of the amount you need. Of course, this only works if you aren’t buying a home worth millions. This method helps reduce the scrutiny on your loan. It may also help you secure a lower interest rate because conforming rates are often lower than jumbo rates. Even adding a slightly higher home equity rate often averages lower than the jumbo rates.
If you need a jumbo loan, take time to prepare your financial situation. Save as much as you can for the down payment as well as for reserves. Make sure your income is consistent and verifiable as possible. Also pay down your debts as much as you can.
Preparing for a jumbo loan may take more time than it would for a conforming loan. It pays off in the end, though. These loans are much riskier for lenders. They need low-risk borrowers for these loans. It’s especially important if they sell them on the secondary market. While the real estate market has improved, there’s still a sense of worry. This causes lenders/investors to tighten restrictions. You increase your chances of approval with every compensating factor.
As always, shop around with different lenders too. Because this is not a program any government agency purchases or guarantees, each lender has their own program. You may find lenders with completely different options for you. Find the deal that works the best for you not only today, but well into the future as well.