What You Need To Know
Congratulations homebuyer, you’re looking for a home loan! One of the most important steps in the home buying process is determining what type of mortgage loan you need to become a homeowner successfully. There are conventional loans, adjustable-rate loans, FHA loans, and even jumbo loans or non-conforming loans.
Picture this: you find your dream house. But, in order to follow through with your home purchase, you need a larger loan. Or, in some parts of the country, you may need a jumbo loan to purchase any house at all.
The good news is that while jumbo loans might appear to be an intimidating option, with the right lender you can navigate the housing market confidently and know that you have selected the right loan type for your need.
The Federal Housing Finance Agency (FHFA) has established a certain set of guidelines and limitations for mortgage loans. Jumbo loans fall outside of those guidelines and are also called non-conforming loans because they do not conform to typical loan limits.
After any mortgage is initiated from the mortgage lender, it is then sold to a mortgage investor like Fannie Mae or Freddie Mac. But, these institutions can only purchase loans within the FHFA limitations.
Additionally, borrowers working with a jumbo loan don’t have the same guarantees as a conventional conforming loan limit, and will often face more scrutiny during the underwriting process along with higher costs associated with home buying.
Jumbo Loan Limitations
In 2022, the average American buyer (in most states) is only authorized to borrow up to $647,200 to purchase a single-family residence. However, states like Alaska, Hawaii, New York, and California have exceptions for conforming loan limits because the median home price in these states is significantly higher. In other high-cost areas throughout the country, conforming loan limits are determined on a county-by-county basis. Helpful tools from the FHFA like this can help borrowers determine what conforming loan limits look like in their area.
Jumbo Loan Rates
There is much more risk for mortgage lenders with a jumbo loan. Therefore, a lender might charge a higher interest rate for borrowers looking to take out a jumbo mortgage. According to Bankrate though, some jumbo loans actually have lower interest rates than a conventional loan right now, and if not – jumbo mortgage rates are in line with competitive market rates.
Conducting thorough research is one of the most crucial components for potential homeowners to complete when looking for a loan. Check out online resources like this to help you determine what loan type is right for your financial situation. You can also get in touch with an expert loan officer from Delmar Mortgage to help walk you through the process of getting a jumbo loan.
Now that you understand the basics of jumbo loans and how they work compared to a conventional loan, let’s look at what it takes to get a jumbo loan. With the higher risk to lenders, the process for applying for and receiving a jumbo loan is often similar but different in requirements to a conventional loan.
High Credit Scores
Much like a conventional loan, your mortgage lender will need to see a high credit score when assessing your application for a jumbo loan. Credit scores are one of the quickest ways for a lender to guarantee financial responsibility from a borrower, and are heavily considered during the lending process. Typically, lenders like to see a 700 or higher credit score from applicants for a jumbo loan, with a clean credit history. This means no missed or late payments, no foreclosures, or bankruptcy.
It is best to wait to apply for a jumbo loan if any of these things appear on your credit history, and any foreclosures or bankruptcy will often result in immediate denial when applying for a jumbo loan.
Debt-to-Income Ratio (DTI)
Your DTI is another critical component to a successful application for a jumbo loan. Your debt-to-income ratio is your gross monthly income compared to any outstanding debts you have, like a car payment or credit card bills. If your debt percentage is higher than your gross monthly income, many lenders will be hesitant to give you a jumbo loan, or any loan for that matter because you may not be able to pay it back in the event of financial hardships.
When applying for a conforming mortgage, a 43 percent debt-to-income ratio is ideal for lenders. However, jumbo mortgages require a lower DTI to ensure prompt and guaranteed payments. Additionally, a high credit score may offset a higher DTI, just as a low DTI may offset a low credit score with high cash reserves.
An additional major factor that lenders look for during the jumbo loan application process is cash reserves. This is different from a conventional loan because lenders look for six to twelve months’ worth of cash reserves that could cover the monthly mortgage payment for a jumbo loan if need be. The cash reserves are used as a guarantee that your mortgage lender will still receive loan payments on time in the event of an emergency or financial hardships.
Cash reserves are not the same as a downpayment and closing costs, though. A conventional loan typically requires the borrower to put down 3 to 5 percent of a downpayment, whereas a jumbo loan will typically require a minimum of ten percent down and any additional closing costs that are needed.
Jumbo Loan Qualification Process
It’s time to apply for a jumbo loan! So, what do you need? As with a conventional loan, the process for applying for a jumbo loan includes sending a few documents to your lender. In addition to checking your credit score, DTI, and cash reserves, your mortgage lender will also need proof of income, assets, and an appraisal to determine your home value.
What documents do you need?
- W-2s and annual tax returns from the past 2 years
- 60 days of bank statements
- Minimum of 2 most recent pay stubs
- Proof of any income like commissions, bonuses, investments, and other income deposits
- For private businesses or self-employed applicants, lenders also require your profit, loss, and balance sheet
Fees and LTVs
After you provide these documents, the lender will also order an appraisal done on the home. This determines the loan-to-value (LTV) ratio and insures that the property value is high enough for a jumbo loan.
The LTV is also used to determine the down payment on your new home, in addition to what the interest rate will be. The loan-to-value ratio is determined by dividing the loan amount by the appraisal value. A low LTV is an advantage to borrowers because it means a lower interest rate.
Additionally, the lender will calculate what you need to bring to the table in closing costs. As mentioned, cash reserves are not the same as a down payment and closing costs and lenders will need to verify that you can also have the appropriate amount without dipping into cash reserves. A jumbo loan is more expensive as opposed to conventional mortgages and therefore will require more closing fees and higher down payment.
Is a Jumbo Loan Right for you?
Whether you’re purchasing real estate, looking for a second home, a vacation home, or just trying to purchase a new home in a state with exceptions for conforming loan limits, there are many reasons to take out a jumbo loan.
The best way to understand jumbo loans, jumbo loan limits, and all of your loan options is through careful research and by connecting with an experienced loan officer who can help you determine what is the right decision for your purchasing needs.
To understand whether or not a jumbo loan is right for you, ask yourself and answer these questions:
- Do I have a high credit score and good credit history?
- If I don’t (or if I do!) do I also have low DTI and sufficient cash reserves?
- Is the property value high enough for the LTV?
- Am I in good financial health, and can I prove my income matches what would be needed for a jumbo loan?
- Can I cover the downpayment and closing costs?
If you feel confident with your answers above, that is a good indicator that you are ready to apply for a jumbo loan.
Get in Touch with a
Jumbo Loan Expert
Regardless of where you are at in applying for a jumbo loan, whether you are simply researching or actively looking into qualifying for a home loan, it is best to speak with an expert lender before making any decisions.
Our expert mortgage lenders at Delmar Mortgage come equipped with decades worth of experience in helping homebuyers find the best monthly payment for their new home, and understand the unique ins and outs of the real estate market.