What are Jumbo Loans?
A jumbo loan is one where the loan amount exceeds allowable conforming limits set by Fannie Mae and Freddie Mac. For most parts of the country, this limit for single family homes is $484,350 but in areas that are considered “high cost” where residential real estate is much higher than in most parts of the country, the conforming loan limit can be as high as $726,525. Any loan amount beyond this limit will fall into the jumbo category. Each year the Federal Housing Finance Agency reviews the national median home value and adjusts the conforming loan limit for the following year should there be a year-over-year increase.
Fannie Mae and Freddie Mac both issue guidelines that lenders can follow. When lenders do approve a loan meeting these guidelines the loan is eligible for resale in the secondary market, most usually directly to Fannie or Freddie. Selling loans in the secondary market helps maintain liquidity in the lending universe.
Nearly two out of every three residential mortgages made today are either Fannie or Freddie. The Jumbo market on the other hand, makes up closer to 10 percent of the market. The secondary market for this type is much smaller compared to conforming and government-backed residential home loans.
What are the Loan Requirements?
Guidelines can vary from one lender to the next but there are some general requirements that most jumbo lenders ask for.
Credit and credit scores need to be better compared to minimum credit scores for other types of loans. The credit score used is the FICO score. This score ranges from 300 to 850 and there are three reported scores, one each from the credit bureaus of TransUnion, Equifax and Experian. Of the three reported scores, lenders use the middle score (FICO) for qualifying purposes. Most jumbo type loans ask for credit scores to be at least 700 although other programs require a minimum score of 720-740.
Down payments for these type of loans also require more compared to other programs. Most jumbo loans ask for a down payment of at least 20% of the sales price but borrowers can get slightly better terms with a down payment of 25% or more.
What are the Benefits?
This type of loan provides long term financing options for higher end homes. Other short term solutions that are higher than the prevailing conforming loan limits may be for only three to five years. This kind of loan can have a term up to 30 years. The 30 year term is the most popular but shorter term loans are available.
What are the Loan Limits?
This type of loan has its own classification as it relates to loan limits. Anything above the conforming loan limit is a jumbo but there is another category loosely referred to as “super jumbo.” This limit is a moving target based upon which lender is offering the program but most such loans are labeled if the loan amount is more than $5 million although other lenders categorize a super jumbo as anything above $2 million to $15 million. A super jumbo loan will ask for a larger down payment compared to a traditional jumbo along with higher rates.
What are the Loan Guidelines?
Different loan programs can have their own specific approval guidelines but there are some general requirements that most jumbo type loans follow. As it relates to employment and income, borrowers will be asked to provide evidence of at least two years of employment history. This can be verified by providing copies of the last two years of W2 forms. For someone that is self-employed or otherwise receives more than 25% of their income from sources other than an employer, the last two years of federal income tax returns can be used to verify the two year employment guideline.
Income is documented by providing a full month’s worth of pay check stubs. For the self-employed borrower, income is calculated by averaging reported income on the tax returns along with a year-to-date amount to arrive at a monthly figure.
Bank statements are used to verify sufficient funds to close and the deposits should match up with the income reported on the loan application.
A jumbo loan can be used to finance a primary residence, an investment property or a vacation or second home.
How to Qualify for a Jumbo Loan
After a review of your initial application we will supply you with a list of documents needed in order to get the loan in process and to the underwriting department. It is the underwriting department that will make sure your completed loan package meets jumbo loan requirements.
You may also initiate qualification by speaking with your loan officer over the phone. You’ll be asked a few questions about income, credit and such and be given a general idea regarding how big of a jumbo loan you can qualify for. Or, if you have a property picked out, we can provide you with various financing options. When you’re ready to make an offer or you want to take it to the next step and get preapproved (recommended) we’ll provide you with your documentation checklist.
Most jumbo guidelines also ask that your debt-to-income ratios be at or below 45. This means your total monthly house payment plus taxes and insurance along with other monthly credit obligations such as a car payment and credit cards, should add up to no more than 45% of your gross monthly income. By meeting the minimum credit score requirement, providing there are sufficient funds to close on the transaction, your debt ratios are in line with jumbo guidelines you may qualify for a jumbo loan. Additionally, once your application is submitted and a property has been selected, be prepared to answer any questions the underwriter might have as your loan is being reviewed.
How to Apply for a Jumbo Loan
Applying for a jumbo loan is really a simple process. The most convenient way that our clients tell us to apply directly on our website. The online application form only takes a few minutes and once uploaded to our site we will download your application and submit it for an initial review. Don’t worry about getting all your numbers exactly correct, if there are any changes that need to be made during the processing of your loan, they can be made at any time.
