Jumbo Loans

July 26, 2018

What is a Jumbo Loan & When Do I Need One?

Matt Quinn

Mortgage Banker

Home prices are steadily rising as the housing market continues to recover. Ultimately, this caused a surge in popularity for Jumbo Loans.

What is a Jumbo Loan?

A Jumbo Loan refers to a loan that exceeds the conforming loan limits set by government-sponsored enterprises. Since the loan amount exceeds the conforming limits, a jumbo mortgage is considered a non-conforming loan. Non-conforming loans are not eligible to be guaranteed by Fannie Mae or Freddie Mac. The Federal Housing Finance Agency (FHFA) sets the conforming loan size limit for different areas on an annual basis, and it varies by state by and county. For most of the country, this amounts to any mortgage over $453,100.

How do I qualify for a Jumbo Loan?

Since Jumbo Loans aren’t guaranteed by Fannie Mae or Freddie Mac, this creates more risk for the lender, not to mention that there is more money involved in the transactions. The credit requirements are more stringent than their conventional loan counterparts. Typically, the minimum credit score for approval is 700. There are programs available for a credit score of 680 or lower, but you should be prepared to pay a higher interest rate for if your credit scores falls below 700. The debt-to-income requirements (DTI) are also more rigid; under 43% is standard, but many lenders will prefer that you are closer to a 35% DTI.

You will also need to prove that you have adequate income to cover your mortgage payments. Most borrowers will need to provide 30 days of paystubs, two years of W2 tax forms, two months of most recent bank statements, and two years of tax returns. If you are self-employed, jumbo loan approval requires at least two years of stable self-employment income. If you started a business less than two years ago, approval will be very difficult unless you have substantial assets. If you have substantial assets, a lender can use asset depletion for their income calculation. If you are having difficulty getting qualified for a Jumbo Loan due to income requirements, having additional borrowers can help with your qualification. Typically, for a person to be considered a borrower they must be living in the property. Borrowers should also be prepared to show enough reserves, or assets, to cover between six and twelve months of mortgage payments.

Jumbo Loan rates, down payment requirements, and loan options

In the past, Jumbo Loans carried higher interest rates than conventional mortgages, but this has changed in recent years. Jumbo rates are often comparable with conventional mortgages and can even be lower in some cases. Down payment requirements have also loosened. A Jumbo Loan is possible with as little as 10%, or even 5% down. Of course, you’ll want to keep in mind the advantages of a higher down payment including the cost of private mortgage insurance, a lower monthly payment, and lower interest costs over of the life of the loan.

Like a conventional mortgage, a Jumbo Loan offers multiple fixed and adjustable rate (ARM) options. This includes, but is not limited to: 15-year fixed, 30-year fixed, 30-year ARM 7-1, and a 30-year ARM 10-1. An ARM has a fixed rate and term, but then adjusts at a future date. For example, a 7-1 ARM is fixed for seven years, but then adjusts based on an index of the lending institutions preference. While many borrowers are skeptical of ARMs given the risks, many jumbo borrowers will leverage the lower initial rate offered on ARM to pay down their loan balance at a faster pace. Keep in mind that every situation is unique, and you should choose the loan option that best fits your needs.

When should I use a Jumbo Loan?

Typically, borrowers who are high-income earners are the most fitting for a jumbo loan. Homebuyers who make a lot of money but don’t have the cash reserves for a conforming loan are the most common candidates. A jumbo loan can also be ideal for borrowers who want to leverage the lower interest rate of a jumbo loan and save their cash reserves for an alternative investment. Another common use is to obtain a jumbo loan to free-up cash flow and reinvest funds back into a business or investment of your choosing.

If you have any further questions about Jumbo Loans, contact me here or at 573-822-4867.

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