At the end of 2019, banks tightened lending standards to avoid another housing bubble. The stricter lending criteria doesn’t mean borrowers can’t get loans, but it does mean having your affairs in order before submitting an application.
Jumbo loan requirements have also gotten stricter since the coronavirus shutdown in early 2020. If you’re looking to apply for a jumbo loan, check out this overview of the approval requirements.
Jumbo Loan Requirements
Jumbo loans aren’t for everyone. If you’ve got your eyes set on a luxury property, there are two ways to go about paying for the home.
The first way is to pay for your home using cash. This option is usually much easier for borrowers who are high earners and have had the time to save to buy a house outright. But other high earners may not have the career longevity to have their financial affairs in order.
This small demographic of borrowers, who typically earn between $150,000 to $500,000 or more per year, might consider a jumbo loan on their next home. Loans are considered ‘jumbo’ once they reach $500,000 or more but the amount varies by state.
What’s the Limit on a Jumbo Loan?
The jumbo loan limit was $484,350 in 2019. This amount is a $31,250 increase from the previous year meaning homeowners could get a conventional loan for high-cost properties.
In 2020, the jumbo loan limit begins for most of the U.S. at $510, 400, and go as high as $3 Million or more. There are some markets where housing is much higher than the national average. In these communities, jumbo loan limits are much higher. For example, in Alaska, the jumbo loan limit is $726,525. This is important to know because it impacts your loan terms.
Jumbo loans can’t be backed by Fannie Mae or Freddie Mac making them a higher risk for lenders. People who borrow jumbo loans are higher risk and subject to stricter lending terms. The more you borrow, the higher the risk, which is why down payments might be higher for jumbo loans.
Saving for a Jumbo Loan
Even if you’re a high earner, expect to bring lots of cash to the table with a jumbo loan. It’s not uncommon for lenders to ask for a 20 percent down payment on a jumbo loan, although some can be as little as 10% down.
You’ll also need a larger amount of cash reserves to prove you can make payments in the event you lose your job or have a financial emergency. These reserves should be liquid, or available as cash, during the closing process.
This disqualifies using a retirement account as cash reserves. The best option to show reserves is leaving a lump sum in a bank account.
Keep in mind this money shouldn’t be spent while you’re going through the closing process. Choose a savings account that’s not linked to a check card to keep your expenses separate.
The purpose of cash reserves is to show a surplus that you don’t need to cover everyday expenses. Using even a small part of the money shows it’s money you need in order to cover your monthly budget.
Save at least 12 months’ worth of mortgage payments as cash reserves. Some banks might require less, but this amount is a good starting point when shopping for a jumbo mortgage loan.
How to Qualify for a Jumbo Loan
Lending criteria is stricter for jumbo loans than they are for conventional mortgage loans. You’ll need good to excellent credit to qualify.
This usually means a credit score above 700, but this number might be higher for some lenders. Borrowers should also make sure they’ve paid down debt before applying for a jumbo loan.
Lenders want to see a lower debt to income ratio than what’s required for a traditional mortgage loan. If possible, it’s a good idea to pay off any balances you’re carrying on credit cards or other revolving debt.
Because the mortgage amount is much higher than the average cost of a home, it’s a higher risk for the lender that’s not backed by the federal government. Having a low debt to income ratio assures lenders that you have the financial flexibility to adjust your finances if the need arises.
Plan to have a debt to income ratio of no more than 30 percent to increase your chances of approval. Of course, having a lower debt to income ratio than 30 percent means having far more mortgage options to choose from.
Make sure you have last years’ W-2s when applying for a jumbo loan. You’ll also need past years’ tax returns and 1099s if you work as a contractor or freelancer.
If you work for yourself, the amount of documentation needed for your loan is much more extensive. Lenders might ask for more tax returns to determine whether your income is consistent.
Self-employed borrowers might also be required to have more in cash reserves because having your own business is a higher risk. Though it’s not considered cash reserves, lenders also like to see retirement account statements along with a list of your investments and assets.
Interest Rates and Fees
The interest rates on jumbo loans are typically higher than traditional loans. The difference in rates depends on the lender and your financial situation.
As with conventional loans, your chances of a lower interest rate increases the higher your credit score. You’ll need to shop around to find the best rate option especially if interest rates are down.
The amount you bring to the closing table will be higher since the transaction is larger. Appraisals, home inspections, and attorney’s fees can cost more to cover a potentially larger property and luxury home features.
Am I Ready for a Jumbo Loan?
Jumbo loans require a bigger commitment than conforming loans. Just because you meet jumbo loan requirements doesn’t mean you should get one.
The higher fees can mean a financial set back if you’re just starting out in your career and haven’t settled into a consistent household budget. Weigh the pros and cons of pursuing a jumbo loan with an experienced mortgage broker.
There may be other options available that better fit your lifestyle needs. To schedule an appointment with a mortgage professional, contact us today.