Jumbo Home Loan

Jumbo Home Loans – Jumbo Mortgages

A jumbo mortgage, also called a jumbo loan, is a mortgage that exceeds conforming loan limits set by the Office of Federal Housing Enterprise Oversight. A jumbo mortgage sounds like the stuff of millionaires, but that’s not necessarily true. While it is a larger debt than most home mortgages, a jumbo loan may be your best choice, depending on your income, the price of the home you want to buy and the loan options available to you.

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What is a Jumbo Loan

A jumbo mortgage, also called a jumbo loan, is a mortgage that exceeds conforming loan limits set by the Office of Federal Housing Enterprise Oversight. Conforming loan limits cap the dollar value on loans that are backed by a government-sponsored program or enterprise. A nonconforming loan is any mortgage that exceeds the limit for Fannie Mae, Freddie Mac and FHA.

How Big is a Jumbo Loan

A mortgage doesn’t have to be seven digits to be called a jumbo loan. A loan amount of even $1 more than the loan limit for your county puts it into jumbo loan status. For most of the U.S. counties, the conforming loan limit for a one-unit property in 2020 is just over $500,000, but some counties have higher limits, so a jumbo loan in one city can be a conforming loan in another. Conforming loan limits are higher in high-cost areas like Northern California and New York City, and highest in Honolulu, at over $725,000 for a one-unit property. Limits are tied to local median home values, and you can find the limit for each county on the Federal Housing Finance Agency’s website.

Qualifying for a Jumbo Loan

Jumbo loan approval is based on the same basic formula as any other mortgage. Eligibility depends mainly on income, cash reserves, credit score, debt, employment status, property type and property use.

Qualifying for a jumbo loan tends to be a little harder than qualifying for a conforming loan. When a loan falls outside the parameters set by the government, the lender has to mitigate financial risk in other ways. Jumbo loans are manually underwritten, and all factors are considered carefully; the qualifications tend to be more stringent. The documentation requirements are much higher on a jumbo loan than on a conforming loan, particularly after the housing crisis. This can be a surprise for some borrowers. The underwriter will examine at a much deeper level of detail the applicant’s tax returns, assets and other qualifications. You’ll need to meet, and in some cases exceed, the standard requirements for a conforming mortgage. Each lender sets its own eligibility criteria. Usually, your credit score has a lot more weight in a jumbo application. Reserves also have more weight, as do prior credit events. If you have a bankruptcy on your record, it has to be older, and a foreclosure can disqualify you. Keep in mind that if your application is weak in one area, you may be able to make up for that weakness with a stronger showing in another. For example, if your credit score is on the low side, you may qualify with a larger down payment.

Credit Score – Jumbo Loan

Credit score requirements are higher for a jumbo loan. Some conforming mortgage programs are available to applicants with a credit score as low as 500, but for a jumbo loan, you’ll usually need a credit score of at least 680. Many jumbo loans require a score of 700 to 720 or higher. Generally speaking, the credit score requirement will reflect the loan amount, the size of the down payment and the amount of debt you carry, but a lower credit score is not an insurmountable barrier to a jumbo loan. Although the best loan products are offered to applicants with higher scores, many programs are tailored to borrowers with weaker credit.

Debt-to-Income Ratio Jumbo Mortgage

The allowable debt-to-income (DTI) ratio may be lower for a jumbo loan than for a conforming mortgage. A high DTI, if allowed, will probably result in a more expensive loan. In an example, an $800,000 loan in Sarasota, Florida jumped from a best interest rate of 4.75 percent to 5.375 percent when the DTI increased from 43 percent to 48 percent. For qualified jumbo loans – meaning the loan has features that make it more likely that you can afford to repay it–you can expect to see a DTI limit of 43 to 45 percent or lower.

Cash Reserves
Jumbo Home Loans

Under most circumstances, mortgage lenders want the applicant to have some cash available, in case there’s an emergency. For conforming loans, the cash reserve requirement may be as little as one month’s housing expenses. Your jumbo mortgage lender will probably require between three and 24 months’ reserves. You can satisfy the reserve requirement in several ways. Obviously, money in the bank qualifies as a liquid asset. If you have a retirement or other investment account, the lender may consider 70 percent of your balance to be liquid, though you don’t have to cash out the account for the purposes of the mortgage application. In some cases, gift or business funds can be used to meet the reserve requirement. An exception to the reserves requirement may be granted if your DTI is very low or your down payment is high.

Down Payment
Jumbo Home Loan

A 20 percent down payment is the gold standard for mortgages, and in the not-too-distant past, some jumbo mortgage lenders required even more. Today, however, jumbo loans are available with much less of your own funds down. Some borrowers who want to avoid paying private mortgage insurance, or PMI, required when a loan is more than 80 percent of the purchase price, without a 20 percent down payment, take out a piggyback loan. A piggyback loan is a second mortgage taken at the same time as the first mortgage to cover a portion of the purchase price. For example, a first mortgage for 80 percent of the purchase price, a second mortgage for 10 percent and a down payment of 10 percent is a common scenario. You should ask your lender whether or not down payment assistance is permitted. Most lenders allow at least a portion to come from gifted funds, but you can expect to pay at least 5 percent down from your own funds. If you make a down payment lower than 20 percent, you will probably pay a higher interest rate or mortgage insurance premiums, or both.

Are Jumbo Loans Backed by the Government

Many government-backed mortgages are designed for moderate- and low-income borrowers. The U.S. Department of Agriculture loan program has strict income limits that make it virtually impossible to qualify for a jumbo loan because you won’t pass the DTI test. The Federal Housing Administration loan requires PMI for the life of the loan, so using a piggyback loan to bring the balance down to conforming loan limits doesn’t make financial sense. Borrowers would be better served with a non-FHA loan product. The U.S. Department of Veterans Affairs program, however, can be used for a jumbo loan, and the VA will insure the portion of your loan that falls under conforming loan limits. The down payment requirement is based on the portion of the loan that is above the conforming loan limit.