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Jumbo loans are a non-conforming loan option perfect for buyers looking in higher-priced locations or who have a more expansive homebuying budget.
A jumbo loan is used to purchase higher-priced homes or larger properties with loan amounts that exceed the values set by the Federal Housing Finance Agency (FHFA) for conforming loans. Because these loans do not conform to the loan limits set out by the FHFA, they are not eligible for purchase by government-backed entities such as Fannie Mae and Freddie Mac. These loans are underwritten to individual investor guidelines, as these larger corporations can write stricter rules to fund these loans above the county’s loan limit.
The FHFA creates these loan limits to create stability in the marketplace and allow more of the population to access a mortgage. In 2022, the “low-balance” county loan limit is $647,200 and the “high-balance” limit for high-cost counties is $970,800. For loan amounts that exceed these thresholds, standard mortgage guidelines are removed and what is known as a “non-conforming” jumbo mortgage is required.
To offset the risk associated with these larger loan amounts, jumbo loans require higher credit scores, lower debt-to-income (DTI) thresholds, larger down payments, assets held in reserves, and stricter underwriting standards overall.
Investors are entities (often other large banks, credit unions, or funds) that buy mortgages from mortgage banks right after they fund. At JVM Lending, we have access to an extensive array of investors who will buy jumbo loans. Each of these jumbo investors has its own set of guidelines for things such as minimum credit score, liquid reserves held after closing, debt ratios, and down payment.
When we pre-approve jumbo loans, we “target” the investor with the best terms our clients will qualify for. Some of our investors have incredibly stringent guidelines but also have the lowest interest rates. Typically, investors with more lenient guidelines will have higher interest rates.
View mortgage rates for September 24, 2023
Because the guidelines for jumbo loans are far more stringent than conforming loans, interest rates tend to be significantly lower. The range varies depending on a variety of economic factors, but often jumbo rates are 1-2% lower than conforming rates.
Jumbo loans can allow you to reach loan amounts well above the conforming loan limits, which significantly expands your purchasing power.
We have access to over ten different jumbo investors, each with a different set of guidelines. This gives us the flexibility to match you with the best program for your scenario.
These loans can be very tricky to qualify for – you’ll need excellent credit, strong income, and plenty of assets. If you can’t meet all the requirements, you’ll need to keep your loan amount below the county loan limit.
Underwriters assess all aspects of a jumbo loan with more scrutiny than a conventional or FHA loan, which can result in additional document requests. This, along with the more stringent appraisal standards, results in a longer closing timeline for jumbo loans versus conventional or FHA loans. JVM Lending is still faster than almost everyone else on this front and can close jumbo loans in as fast as 17 days.
With higher loan amounts comes a higher monthly payment. Even if you can qualify for a higher monthly payment, you’ll want to ensure this aligns with your budget. If keeping your monthly mortgage expense as low as possible is a high priority, a jumbo loan might not be the right fit for you.
Obtaining a non-conforming mortgage requires more extensive documentation than a conforming loan, ranging from full tax returns, verified housing history, and additional requests for self-employed borrowers.
Additionally, jumbo loans have stricter appraisal standards that prevent us from using our panel of hand-picked appraisers in favor of investor-approved appraisers. These appraisals will have higher fees and take longer to complete due to the long list of requirements and larger size of the property. Jumbo investors often require a second review of an appraisal, known as a Collateral Desktop Analysis, or in some cases, a second full appraisal.
The longer appraisal timeline is one of the reasons that our fastest closing time for jumbo loans is 17-21 days, whereas we can shorten this to 12-14 days for conforming loans.
Although clients may have the assets on hand to buy a more expensive home, we will need to prove that there is enough income to offset any current (or future) liabilities.
Jumbo loans have stricter debt-to-income (DTI) requirements, which compare your total expected monthly liabilities (including the mortgage payment) to your total monthly income.
For example, if you have a car payment of $400 per month, a credit card payment of $100 per month, and an anticipated mortgage payment of $5,000 per month, your monthly liabilities total $5,500, which we then divide by your gross monthly income. For this example, we’ll say that your gross monthly income is $14,000; $5,500 divided by $14,000 amounts to .39, meaning your debt-to-income ratio is 39%.
The debt-to-income ratio threshold is typically 43% for jumbo loans but can be lower for some adjustable-rate products. This is far lower than the 49% limit for conventional conforming loans and 56% limit for FHA loans.
Conforming and FHA loans have the most flexibility for down payments, as low as 3-3.5%. However, with the larger loan size of non-conforming options, most investors require as much as 20% down to access the best possible rate, while some will allow as low as a 10-15% down payment with additional caveats for income or reserve requirements.
Jumbo loans also require that a certain amount of funds be held in your accounts after closing. This is known as the “reserve requirement” and acts as an emergency fund. One month of reserves is equal to one monthly mortgage payment. Most investors will require 12 months of reserves held in your accounts once the down payment and closing costs have been accounted for, although this can vary from 6 to 18+ months, depending on the loan size and down payment.
Most types of jumbo financing require that you demonstrate at least 12 months of timely rental or mortgage payments. A landlord or property management company can confirm rent payments.
Clients who own an existing primary residence can easily verify their on-time mortgage payment history through their credit report.
For conventional loans, lenders will look for credit scores of at least 620. However, since jumbo loans carry more risk for the investor, most investors will look for a score of at least 700, with some requiring as high as 740 for higher loan amounts and as low as 680 for lower loan amounts or more lenient guidelines.
A high credit score is not the only thing required for jumbo loans. Most investors have requirements for a certain amount of credit tradelines opened or credit history established. Examples of common tradelines are credit cards, student loans, auto loans, mortgages, and lines of credit. The investors offering the lowest rates often require at least a 24-month history and at least three total accounts, one of which needs to be currently active.
View mortgage rates for September 24, 2023
Jumbo loans typically come with two rate options – fixed-rate and adjustable-rate mortgages (ARMs). ARMs can have rates as much as ½% lower than a 30-year fixed-rate loan, which makes them an excellent option if you are hoping to secure the lowest interest rate possible.
“ARMs” refer to mortgages that amortize over 30 years, with an introductory fixed rate. The introductory period typically lasts 5, 7, or 10 years, then the interest rate adjusts every six months. ARM products can be an excellent fit for clients with a short-time horizon or who plan to refinance/pay off the loan in the coming years.
Because the adjustable nature makes ARMs a “riskier” product, many investors have higher credit score requirements or lower debt-to-income ratio restrictions for ARMs than 30-year fixed-rate loans.
If you’re unable to meet the stringent qualification guidelines associated with jumbo financing, combination financing may be an excellent alternative for you. This loan type allows us to sidestep many of the more difficult requirements of jumbo financing, such as a 20% down payment or showing reserve funds, making them an excellent alternative if you are looking at homes in a higher price range.
Combination financing consists of two loans – the first at the maximum conforming loan limit and a second loan to “bridge the gap” between your minimum 10.01% down payment and your purchase price. Underwriting guidelines for combination financing are much less stringent than they are for jumbo loans, but they will still require a minimum credit score of 680 and a maximum debt-to-income ratio of 45%.
There is no one-size-fits-all for mortgage financing. The best way to determine whether a jumbo loan makes the most sense for you is to talk to one of our mortgage experts at JVM Lending. Our experts can walk you through monthly payment scenarios, give you current interest rates, and discuss any other questions or concerns you might have.
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