Jumbo Loans
Buying your dream home is an exhilarating experience — however, large home loan amounts can come with challenges.
Jumbo Loans
Buying your dream home is an exhilarating experience — however, large home loan amounts can come with challenges. The good news is that jumbo loans are a ready-made solution for home buyers interested in purchasing a higher-cost property, or a property in a higher-cost area. Jumbo loans are perfect for buyers whose desired loan exceeds local limits.
Because jumbo loans carry a higher risk for lenders than conventional loans, borrowers may have to adhere to stricter qualification requirements. Read on for a detailed look at jumbo loans, how they differ from conventional loans, and what qualifications a home buyer needs.
What is a Jumbo Loan?
Simply put, a jumbo loan exceeds the traditional, or conforming, loan limits that are enforced by the Federal Housing Finance Agency (FHFA). For conforming loans, the 2021 limit is $548,250 in the majority of areas and $822,375 in more expensive areas. However, in order to obtain a loan that surpasses these limits, borrowers need to apply for a jumbo loan.
While conforming loans are offered through governmental bodies like Fannie Mae and Freddie Mac, jumbo loans can come from private institutions. This offers borrowers an extra level of flexibility; however, as previously mentioned, jumbo loans do tend to be more exclusive than conforming loans.
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How a Jumbo Loan Differs From a Conventional Loan
While conventional loans are designed for home purchases that stay within average market prices, jumbo loans are geared toward more expensive properties. These purchases can run into the millions of dollars. Because these high amounts aren’t covered by government-sponsored enterprises Fannie Mae and Freddie Mac, borrowers must turn to private lenders who will grant larger jumbo loans.
Both types of loans require borrowers to have the minimum required credit score, down payment amount and the ability to repay the loan. That said, jumbo loans are generally more difficult to obtain than conventional loans. For example, borrowers who qualify for jumbo loans should have low debt-to-income ratios, fall into a high-income bracket and have outstanding credit (additional assets required). After all, lenders need some assurance that borrowers can make the larger monthly payments that come with jumbo loans.
How Jumbo Loans Work
Because jumbo loans are considerably larger than conventional loans, it’s logical that they have stricter borrowing requirements. This way, lenders can have some confidence in borrowers’ ability to keep up with higher-than-average mortgage payments. Although jumbo loan interest rates have decreased in recent years, they remain higher than those associated with conventional loans.
In the same way, the required down payment percentage for jumbo loans has decreased over the years and is now around 15-20% of the home’s purchase price. Borrowers can apply for jumbo loans through institutions like banks, credit unions and mortgage companies.
Qualifying for a Jumbo Loan
Given that jumbo loans provide borrowers with a larger-than-average mortgage loan amount, it’s not surprising that they come with a stricter set of qualification requirements. Everything from the borrower’s credit score and debt-to-income ratio to their down payment and documentation must be impeccable to qualify for a jumbo loan.
The required credit score for a Jumbo loan may be higher than what’s needed for other kinds of mortgages and can vary depending on the size of the loan in question. The base credit score for a jumbo loan is 680 — this would generally suffice for a $1 million loan. However, incrementally larger loans require higher credit scores.
For example, for a $1.5 million loan, borrowers should have a credit score of around 700. Loans up to $2 million, however, require a credit score of 720 or above.
For example, for a $1.5 million loan, borrowers should have a credit score of around 700. Loans up to $2 million, however, require a credit score of 720 or above.
Yet another factor that lenders use to determine a borrower’s ability to manage a jumbo loan is their debt-to-income ratio (DTI). As its name suggests, a debt-to-income ratio indicates a borrower’s debt and expenses in relation to their gross monthly income. When it comes to jumbo loans — and even conventional loans — lower DTIs are better.
A low DTI shows that you can responsibly manage additional expenses, while a higher DTI indicates that you are spread thin financially. Lenders agree that jumbo loan borrowers should maintain a DTI under 43% to qualify. To reiterate, the lower the DTI, the better.
A low DTI shows that you can responsibly manage additional expenses, while a higher DTI indicates that you are spread thin financially. Lenders agree that jumbo loan borrowers should maintain a DTI under 43% to qualify. To reiterate, the lower the DTI, the better.
In addition to a high credit score and a low DTI, lenders also like to know that jumbo loan borrowers have a fair amount of cash. A considerable amount of savings shows the lender that the borrower can make their payments, even if cash flow stops for some reason.
That being said, some lenders seek borrowers who have up to one year of house payments on hand.
That being said, some lenders seek borrowers who have up to one year of house payments on hand.
Borrowers should also expect to pay larger down payments for jumbo loans than for conventional loans. While conventional buyers can get away with smaller down payments — generally from 3% to 20% — jumbo loan down payments may be higher. Lenders may expect borrowers to pay up to 20% of the home’s sale price in a down payment. However, some lenders may be more flexible, accepting as little as 10%.
In order to qualify for a jumbo loan, borrowers should be prepared to share their full financial history with lenders. This may include more documentation than is required for a conventional loan. Prepare to give the lender copies of your full tax returns, 1099s and W-2s.
You should also include your bank statements and documentation showing any investment accounts that you may have. This paperwork will help lenders see that you are reliable and can be trusted to make regular payments.
You should also include your bank statements and documentation showing any investment accounts that you may have. This paperwork will help lenders see that you are reliable and can be trusted to make regular payments.
A borrower’s jumbo loan limit depends on their specific situation — including their credit score, DTI, cash reserves and overall financial history. Each of these elements plays an essential role in helping lenders determine how much of a loan each borrower can manage. As a borrower’s cash reserves and credit score increase, so will their jumbo loan threshold.
Qualifying for a Jumbo Loan
Every homebuyer’s situation is different. The best thing you can do is talk with a mortgage expert who will outline all your options and tailor a mortgage to your needs – before you start house hunting. A loan pre-approval arms you with the knowledge of exactly how much home you can afford to buy, and how. If you’re in the market to buy a home or refinance, contact Capital Bank to speak to a knowledgeable, experienced loan originator.