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As the housing market continues to improve, house prices continue to climb. This leaves many borrowers with the need to take out a jumbo loan. Before this sends you shuddering in fear, you should know that jumbo mortgage rates are not nearly as high as they used to be. In fact, in many cases you’ll find little to no difference between the rates of a jumbo loan and a conforming loan.

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What is a Jumbo Mortgage?

First, let’s look at what defines a jumbo mortgage.

Any loan that is more than the conforming amount is a jumbo. In 2018, this means any loan that is higher than $453,100 as that is the national conforming limit this year. This goes for both Fannie Mae and Freddie Mac loans.

However, if you live in a high-cost area, your maximum conforming limit may be somewhat higher. In general, Fannie Mae and Freddie Mac set a ‘ceiling’ that is 150% higher than the national conforming limit for these areas. This means in high-cost areas, you can secure a conforming, non-jumbo loan for up to $679,650. If you must borrow more than that in high cost areas, you will need a jumbo loan.

The Worry About Jumbo Mortgage Rates

Before the housing crisis, it was true that jumbo mortgage rates were higher than conforming rates. In fact, it was not abnormal to pay more than twice the rate of a conforming loan. This was due to riskiness these loans caused. Once the housing crisis happened, jumbo loans became almost obsolete. If you were lucky enough to find a willing lender, you would pay much higher interest rates as a result.

Today, there is a much larger market for jumbo loans. In fact, there’s even a demand in the investor’s market. This means there’s a greater supply of jumbo loans and less stringent guidelines for them. Borrowers don’t have to jump through hoop after hoop just to get a slightly higher mortgage than the conforming limits allow.

How to Qualify for a Jumbo Loan

So now that you know you can secure a jumbo loan without paying inflated interest rates, it’s time to learn how to qualify for one.

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You still might run into stricter underwriting guidelines only because the lender takes a greater risk providing you with this type of loan. Basically, you need good credit, a low debt ratio, and stable income. It’s not anything unusual or nothing that lenders would require should you get a standard conforming loan.

In general, you’ll need:

A higher down payment, usually 10% – 20%
Credit score of 700 or higher, although some lenders will allow scores as low as 660
Debt ratios that do not exceed 43% on the back-end, but some lenders require lower ratios
Assets on hand to be counted as reserves (separate from your down payment funds)

Finding a Jumbo Loan

The good news is that it’s much easier to find a jumbo loan today. Right after the housing crisis, it might have been a bit more difficult. Lenders were very leery about giving out any risky loans. Today, many lenders offer them which means you can compare your options and choose the most affordable one.

Don’t focus only on the interest rate and/or costs. Look at the big picture. What will the loan cost you when it’s all said and done? Look at the APR; this will give you a good indication of which loan is more affordable. Sometimes, you might find that it’s the loan with the higher interest rate, yet lower closing costs.

Finding a jumbo loan isn’t going to be hard today. In fact, it’s not even hard to find low jumbo mortgage rates. You just have to do your homework and weigh the pros and cons of each loan. When it’s all said and done, you should walk away with an affordable jumbo loan that helps you buy the home of your dreams.

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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 2^nd 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.

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