If you’re shopping for a mortgage, you’ve probably heard the terms conforming and jumbo. They sound conspicuous, so what’s the difference? Besides the size, what else should you know about jumbo loans?
Keep reading to find out.
What are Jumbo Loans?
First, let’s start with the definition of jumbo loans. These loans are any loan that exceeds the national conforming amount. In 2019, the national conforming limit is $484,350. Any loan amounts exceeding this amount are jumbo.
Any jumbo loans don’t get the backing of Fannie Mae, Freddie Mac, or any of the government agencies, including the FHA, VA, or USDA. This makes jumbo mortgages riskier for lenders. They take the risk of default that comes with a larger loan amount. In order to make up for that risk, you’ll typically find tougher underwriting requirements.
Qualifying for a Jumbo Loan
The toughest part of getting a jumbo loan is qualifying for it. Unlike FHA loans where you can have a credit score as low as 580, or even a conventional loan with a credit score around 640-660, you’ll need much higher credit scores and lower debt ratios to get approved.
Credit score requirements
Expect lenders to look for credit scores of at least 700. Some lenders even want scores as high as 720 before they’ll consider you for a jumbo loan. Just like any other loan program, lenders look at your credit history too. Watch any late payments, overextended credit limits, or numerous new inquiries. Lenders take this into consideration when evaluating your loan application.
Debt ratio requirements
The exact debt ratio requirements may vary by lender. In general, you shouldn’t exceed a 43% total debt ratio. This takes into consideration all debts including the jumbo mortgage along with your consumer debts. Try decreasing your credit card balances, paying off installment loans, and decreasing your overall debt before applying for a jumbo loan.
Employment and income requirements
Lenders always want a stable employment and income history, but it becomes even more crucial when you need a jumbo-sized loan. Lenders want a stable employment history of at least two years. Lenders want to see you at the same job for an extended period of time. They also want to see stable or increasing income over the last few years.
Unlike most other loan programs, you’ll need money on hand after you pay the down payment and closing costs. Lenders often require between three to six months of reserves on hand. Reserves are counted by the number of months your assets cover your mortgage payment. If you have a $2,000 mortgage payment, you’d need $12,000 on hand to cover six months of payments.
Large down payment
Lenders typically want you to invest a good amount of your own money when buying an expensive home. Borrowing more than the conventional loan amount allows, puts lenders at risk of default. If you invest your own money, though, you are more likely to do what it takes to avoid defaulting on the loan. Expect to need a down payment of at least 20%, but sometimes as high as 30% for a jumbo loan.
The Jumbo Loan Difference
Aside from the qualifying requirements and loan amount, what makes jumbo loans so different? The risk of default makes them risky. Lenders often charge more for the loans in two ways:
Higher interest rates
Many lenders charge higher interest rates to make up for the risk of default. The more money they collect on your loan while you make payments, the better set up the lender is if you default. This is why it’s important to shop around and find the least expensive lender. You can also control your interest rate by maximizing your qualifying factors, giving lenders a reason to give you a loan.
Just as lenders charge higher interest rates, they often charge higher fees too. Closing costs, like underwriting, processing, and closing fees may be the same as conforming loans. However, origination fees and other lender specific fees may be higher. Expect to pay a point or two (1% – 2% of your loan amount) on a jumbo loan. This is prepaid interest that the lenders collect at the closing that helps them offset the risk of default.
Jumbo loans are achievable, as long as you set yourself up for them. Wait until you have steady employment and income, a good credit score (over 700), and a low debt ratio. You’ll increase your chances of approval as well as decrease the interest rate and costs lenders quote you.