Jumbo financing is necessary when the loan amount required to finance the purchase of a property exceeds the county loan limits set by Fannie Mae and Freddie Mac. Compared to other types of mortgage financing, jumbo guidelines are usually far more stringent and nuanced when it comes to income, asset, and credit requirements. Jumbo financing does, however, sometimes come with lower interest rates, if the down payment is large enough and other qualifying factors are strong. One of the aspects of jumbo financing that most often holds borrowers from pursuing it is the strict credit score requirements.
For mortgage financing, your lender is required to pull a full credit report from all three of the credit reporting bureaus. Your lender will look at the middle of these three scores for every borrower on your loan. If there are two borrowers on your loan, for example, the qualifying score that would be used towards qualification is the lower of the two middle scores. To continue the example, if one borrower has a middle credit score of 800 and the other has a middle score of 730, the 730 score would be used towards the loan qualification.
What Are The Credit Requirements For Jumbo Loans?
The more competitive jumbo financing options require a minimum score of 700, while the less competitive options will allow for a score as low as 680.
Many jumbo financing options also require borrowers to have a minimum number of tradelines appearing on their credit report – with a certain length of history – in order to qualify for financing. Some jumbo financing options often set thresholds for a specific number of active tradelines as well – (“active” is typically defined as showing credit usage within the most recent year).
If a borrower’s credit score is below 700, we would typically recommend Conventional or FHA financing as an alternative for them, given that those financing options have more flexible guidelines. For example, Conventional financing requires a minimum credit score of 620 and FHA financing requires a minimum credit score of 580. It’s important to note, however, that in order to pursue these types of financing, the loan amount must fall within the county loan limits where the property is located.
What Other Factors Affect Qualifying For A Jumbo Loan?
Other than credit scores, there are a few more stringent guidelines for qualifying for jumbo financing.
Down Payment
Most jumbo loans require a minimum down payment of 20%, and the more competitive options (with the lowest rates) sometimes require 25% down. JVM Lending, however, has some special products that allow for a down payment of as little as 5% for jumbo financing – contact JVM for more information.
Debt-To-Income Ratios (DTI)
For your DTI (debt-to-income ratio), we compare your current monthly debt obligations, including your proposed mortgage payment, to your gross monthly income. In order to qualify for most jumbo products, your monthly debt payments can’t account for more than ~43% of your gross monthly income. In contrast, conforming (Fannie Mae and Freddie Mac) financing and FHA financing allow for DTI ratios close to 50% and 57%, respectively.
It’s also important to note that some jumbo financing options may have stricter guidelines regarding income calculations, which can affect your DTI calculation. In addition, further restrictions apply for second homes, Adjustable-Rate Mortgages (ARMs), and self-employed borrowers.
Jumbo loan options also typically require “reserves.” Reserves are excess funds available in your asset accounts after your down payment and closing costs have been covered. While reserve requirements vary, the more competitive jumbo financing options require 12 months of housing payments (principal, interest, taxes, insurance, and HOA dues) to meet the reserve requirements. While many jumbo loan options require reserves to be 100% “liquid” in checking, savings, or brokerage accounts, some jumbo loan options will allow retirement accounts, like IRAs and 401Ks, to be used as well. Please note though that lenders often discount retirement accounts by 30% or more to account for shifts in the market and withdrawal penalties.
The amount of reserves needed are determined by various factors such as (1) the jumbo financing option you’re pursuing; (2) the number of properties you own; (3) the nature of your employment, e.g. self-employed vs salaried; and (4) whether or not you’re using rental income to qualify for your loan.
Housing Payment History
Jumbo financing also requires a strong housing payment history—with timely rental or mortgage payments. If you were living rent-free in a family home, however, some jumbo lenders will grant an exception.
Rental History
To prove that rent payments were made on time, most jumbo lenders will require a signed verification of satisfactory rental payments from your landlord and/or (depending on the lender) twelve months of canceled check images and/or bank transaction histories that reflect timely payments. Payment verifications made via third-party applications like Venmo or Paypal will also be accepted.
Additional Documentation
Jumbo financing, like most mortgages, also requires the full documentation of your income via your W2s, pay stubs, and tax returns. If you are self-employed, lenders will also want to see a profit and loss statement, a balance sheet, and/or business account statements. Note that tax returns are verified for authenticity by obtaining transcripts from the IRS.
What Happens If You Don’t Meet Jumbo Loan Requirements?
Non-QM Loans
If you don’t qualify for jumbo financing, you do not need to give up hope. An alternative option is what is called “Non-QM financing” or a Non-Qualified Loan. These loans have much more flexible guidelines, but they unfortunately come with much higher interest rates too. These loans allow for credit scores as low as 600 and they also allow for alternative income documentation, such as bank statement deposits.
Combination Loans
Another option to explore would be combination financing. This type of financing allows a minimum down payment of 10% and it allows for lower credit scores in some cases. The loans are called combination loans because they combine a conforming first mortgage up to the county loan limit with a second mortgage that brings you to your desired loan-to-value ratio. If you are putting 10% down for example, you could get a first mortgage up to 80% of the value of the property and a second mortgage to make up the additional 10%. The second mortgage is typically a Home Equity Line of Credit with an adjustable interest rate that is tied to the Prime Rate.
These combination loans typically follow Fannie Mae guidelines and are usually easier to qualify for than jumbo loans.
Next Steps: Starting Your Jumbo Loan Application
If you are hoping to buy a home in a higher-priced housing market, it is likely that you will need jumbo financing. The good news is that we are experts when it comes to jumbo financing at JVM Lending. And even better, we can close as fast as 17 calendar days.
