Types of Loans
Jumbo Loan
What is a Jumbo Loan?
Also call a "non-conforming" loan, a jumbo loan is a loan that exceeds the limits placed by Fannie Mae and Freddie Mac.
Jumbo loans are an advantage when buying a luxury property or upgrading to a higher priced home. They allow you to take out a loan that exceeds the limits set out by the FHFA.
Jumbo loans have become more significant in the last two years with the mass of appreciation in the housing market.
However, since they aren’t guaranteed by Fannie Mae and Freddie Mac, they also carry more risk. What this means is the lender isn’t protected if the borrower defaults.
For this reason jumbo loans have more stringent requirements.
Jumbo Loan Requirements
Unlike a conventional loan, underwriting for a jumbo loan is much stricter. Once approved they tend to come with either a fixed interest rate or an adjustable rate. There may be a variety of terms.
Credit Score
With a jumbo loan, the lender may ask for a credit score of 700 or higher.
Income & Employment
Just like with a conventional loan, a lender usually wants to see two years of consistent income within the same field or with the same employer. This must be proved through documentation such as W-2s, tax returns, bank statements, and pay stubs.
If you’re self-employed you may need to submit two years of business tax returns as well as personal tax returns.
With a jumbo loan, you should also be prepared to provide bank statements and any documentation on investment accounts.
Downpayment
The standard for conventional loans is that you are required to put at least 5% down.
However for a jumbo loan you may be asked to put down as much as 20%. This varies by lender, however. Many will allow 10 or 15%.
Cash Reserves
With a jumbo loan, many lenders will ask you to prove you have enough money in the bank to cover one year of mortgage payments. Again this varies by lender. But you’re much more likely to get approved if you have extra money in the bank.
How a Jumbo Loan Works
It’s now possible to get a conventional loan for up to $726,200 in most states. In Hawaii the limit is $1,089,300.
If you need a loan higher than the limit, that’s when you get into Jumbo territory. The loan then becomes what’s called “non-conforming” and you are subject to the stricter requirements.
Debt to Income Ratio
With a jumbo loan, the debt to income ratio becomes more significant. Lenders want to make sure you aren’t going to be over leveraged.
The best way to get the most favorable ratio is to show you have cash reserves. Regardless, many lenders still have a hard rule of 45% debt to income ratio on jumbo loans.
Higher Costs
Since you’re borrowing more money, it generally costs a bit more.
Interest rates on a jumbo loan may be higher depending on the lender. There may also be heftier closing costs than with a conventional loan.
In addition, the lender may require a second appraisal of the home you wish to purchase.
As of late, the gap between conventional and non-conforming has been closing. It’s very possible these days to get rates and closing costs only slightly higher or on par with a conventional loan.
Is a Jumbo Loan Right for You?
Whether you’re a good candidate all depends on your assets, credit score, income and the value of the property you’re buying.
Typically these loans are designed for higher earners with cash reserves that can prove they are safe risk for a larger loan.
If this sounds like something that might be right for you, give me a call at (415) 302-6416 and we can explore your options.
Now is always the best time to get into the home of your dreams.
