Jumbo financing refers to when a property’s loan amount exceeds the county loan limits set by Fannie Mae and Freddie Mac. Compared to other types of mortgage financing, jumbo guidelines are far more stringent and nuanced when it comes to income, assets, and credit. Often you can get much more competitive rates with these products, however, it can be much harder to qualify for.
Because jumbo financing guidelines are so strict, a major factor that often holds back many homebuyers from being able to pursue a jumbo loan is their credit score.
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 each borrower on the loan. If there is more than one borrower, the qualifying score that would be used towards qualification is the lower of these two middle scores. For example, if two co-borrowers had middle credit scores of 800 and 730, the 730 score would be used towards their loan qualification.
What Are The Credit Requirements For Jumbo Loans?
A minimum score of 700 is required for most jumbo financing, though some jumbo financing options allow for a minimum score of 680.
Many jumbo financing options 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 (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 due to their looser 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 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 that are fairly standard when it comes to qualifying for jumbo financing.
Down Payment
Most jumbo loans require a minimum down payment of 20%. Although, JVM Lending has some special products that allow for a down payment of as little as 5% – contact JVM for more information.
Debt-To-Income Ratios (DTI)
For your DTI, we compare your current monthly liabilities/debt, including the proposed mortgage payment, to your gross monthly income. In order to qualify for most jumbo products, monthly liabilities/debt can’t account for more than ~43% of your gross monthly income. In comparison to Conventional financing and FHA financing, where the debt ratio limit is at ~50% and ~57%.
It’s important to note that some jumbo financing may have stricter guidelines regarding income calculations, which can affect your DTI calculation. Also, there are additional restrictions that apply for second homes, ARM financing, and self-employed borrowers.
Typical Jumbo Loan Requirements
Reserves
Jumbo investors require reserves, which are excess funds held in your accounts after the down payment and closing costs have been covered. The amount of reserves is typically calculated as the proposed mortgage payment (1 reserve = 1 mortgage payment). Additionally, investors often discount retirement reserves up to 60% to account for shifts in the market and withdrawal penalties. Some of the strictest jumbo financing options also require that the reserves are held in liquid funds (checking, savings, or brokerage accounts).
The amount of reserves needed will be determined by varying factors such as: 1) the number of properties owned; 2) if rental income is used towards your qualification; or 3) if you are self-employed.
Housing History
Investors may require verification of consistent and timely rental/mortgage payments, though some investors can grant exceptions for living rent-free.
Rental History
The landlord must provide a signed verification of satisfactory rental payments. We’ll also request 12 months of cancelled check images and/or bank transaction histories reflecting timely and consistent payments.
Note: Any discrepancy or any payments made via a third-party app (such as Venmo or Paypal) will also be subject to additional approval.
Additional Documentation
With jumbo financing, borrowers are required to submit their tax returns and provide records of account transcripts. By submitting these documents, underwriters want to verify if taxes have been paid in full, and if there is self-employment income, rental income, capital gains, and other miscellaneous items. If any of these items show up on tax returns, additional documentation may be requested.
For example, if self-employment income is reported on taxes, the standard documentation requests would be for an audited year-to-date profit and loss statement, balance sheet, and business account statements.
What Happens If You Don’t Meet Jumbo Loan Requirements?
Non-QM Loans
One option to obtain financing in the short term would be to pursue a Non-QM jumbo loan, which we can work with a third-party lender to obtain. JVM Lending has some non-QM financing options that allow for credit scores as low as 600! These loans typically do not require as much documentation as standard jumbo financing.
This may allow us to reach qualification much sooner than waiting for credit scores to improve or to meet other stringent guidelines.
Combination Loans
Another option to explore would be combination financing. This type of financing allows a minimum down payment of 10.01%. We will “bridge the gap” between the 10.01% down payment and the first loan at the county loan limit with a second loan in order to reach a higher purchase price.
This smaller second loan will have a higher adjustable interest rate and consists of interest-only payments for the first ten years. Borrowers may be given the option of making fully amortizing payments if preferred – there’s no penalty either way.
Rates are tied to prime, with an 18% life cap on the loan. There is typically a $125 annual maintenance fee and no early termination fee. It’s important to note that the first loan can follow Fannie Mae/Freddie Mac guidelines, as it is under the conventional loan limit. That said, there are fewer restrictions on this loan type than with jumbo financing.
Bottom Line: Jumbo Loans Make Buying A Home Possible While Home Prices Are Climbing
If you are hoping to buy a home in a higher-priced housing market, it’s possible that you may need a jumbo loan. The good news is that the team at JVM Lending are jumbo loan experts and are making it easier than ever to receive jumbo financing with a low rate and super-fast closing (just 17 calendar days).
