You don’t qualify for conventional financing if you need to borrow more than $726,200. This eliminates most standard lenders and puts you in a different bracket. However, jumbo loan financing is an option that can help you buy the home of your dreams.
The qualifying requirements for jumbo loans are much different than conventional loans because of the risks lenders take, but they are a great option if you qualify.
Here’s how they work.
What are Jumbo Loans?
Jumbo loans are loans with a higher loan amount than conventional guidelines allow. Each year the Federal Housing Finance Agency sets conventional loan limits based on the average home price in the country. Any loan amounts above that amount fall outside the standard guidelines of Fannie Mae and Freddie Mac, so they won’t guarantee them.
Without the Fannie Mae or Freddie Mac guarantee, lenders don’t have anyone to bail them out if a borrower defaults. So instead, they take all the risk.
This allows borrowers flexibility because lenders can set guidelines that differ from what Fannie Mae or Freddie Mac require. However, since jumbo loans are risky for lenders, they often require stricter guidelines.
How do Jumbo Loans Work?
Jumbo loans don’t get sold to any investors. Instead, the lender that provides the loan also services it unless they sell the servicing. This allows lenders to set their own guidelines.
You don’t need a jumbo loan unless you borrow more than $726,200 in most areas or $1,089,300 in high-cost areas.
How to Qualify for Jumbo Loans
To get a jumbo loan, you must prove you can easily afford it. Higher loan amounts mean higher monthly payments and more risk for lenders. While each lender has different guidelines, here’s what you can expect on average.
High Credit Scores
The typical conventional loan lender requires a credit score of at least 680, but for jumbo loans, lenders require credit scores of 700 or higher. Some lenders require scores of at least 720.
Also Read : FHA vs. Conventional Loan
This is to ensure you are a good credit risk and aren’t taking on more than you can handle. A high credit score means you use your credit responsibly, including paying your bills on time and don’t overextend yourself.
High Down Payment
Unlike conventional loans, jumbo loan lenders require large down payments. Again, this is because of the risk lenders take. Most jumbo loan lenders require a down payment of at least 20%, sometimes higher.
For example, if you buy a $1,500,000 home, you must put down $300,000 on a jumbo loan. This protects the lender should you default, giving them some leeway when they take possession of the home and resell it to make their money back.
Low Debt-to-Income Ratios
When you borrow a large loan, lenders need to know you don’t have a lot of other outstanding debt. They measure this by calculating your debt-to-income ratio or comparing your total debt to your monthly income.
Ideally, jumbo lenders want borrowers to have a debt-to-income ratio below 43%. This allows enough room to cover the mortgage payment and existing debts while allowing room for living expenses.
Consistent Income
Perhaps the largest requirement is that you can prove consistent income. Lenders take a large risk underwriting a loan that a government agency won’t guarantee. To make up for this, they must feel good about your income, its consistency, and its likelihood to continue. So you may need to provide more than just a couple of paystubs and W-2s. Lenders may also ask to see bank statements and your tax returns.
Cash Reserves
Most jumbo lenders require borrowers to have cash reserves or money set aside to cover the mortgage payment. They want this to be your ‘emergency fund’ should your income change or you cannot work.
Each lender is different, but on average, you’ll need 6 to 12 months of reserves, which means 6 to 12 months of principal, interest, real estate taxes, and homeowners insurance payments.
Second Appraisal
Depending on the home’s sales price, you may also need a second appraisal. This reassures the lender that the home is worth what you agreed to pay and can be used as solid collateral.
Advantages and Disadvantages of Jumbo Loans
Jumbo loans are a great way to help you buy a home that exceeds the conforming loan limit, but like any loan, they have pros and cons.
Pros:
Higher Loan Limits
Jumbo loans allow much higher loan limits than conventional loans, allowing you to purchase a more expensive home if you can afford them.
Competitive Rates
Even though you need to borrow more money, jumbo lenders offer competitive rates when you have the qualifying factors, especially a large down payment and consistent income.
More Loan Flexibility
Jumbo loans have more flexibility than Fannie Mae or Freddie Mac loans because lenders make their own guidelines. This allows them to make exceptions in certain situations rather than turning you down.
Cons:
High Credit Score Requirements
You must have great credit to qualify. Any hiccups in your credit history can make it difficult to get approved.
You Need Cash Reserves
No standard loan programs require cash reserves, but jumbo loans do. This means you may not qualify if you haven’t saved 6 – 12 months of payments.
You Need Extensive Income
Lenders must know that you can afford your loan and that your income is consistent, so they can be tougher on the income requirements.
Final Thoughts
Jumbo loans are a great way to buy a home outside the conventional loan limits. To qualify, you must prove you are a good risk and aren’t likely to default on the loan.
Each lender looks for different qualifications, but overall, if you prove you can afford the payments, have a large down payment, and cash reserves, you have a good chance of securing jumbo loan financing.
If you have any questions about jumbo financing, contact Priva Mortgage to find out more!
