Posted by A jumbo mortgage or jumbo loan is a type of financing offered by lenders that exceeds the limit set by the FHFA (Federal Housing Finance Agency). Unlike traditional mortgages, a jumbo mortgage is not eligible to be securitized, purchased, or guaranteed by Freddie Mac or Fannie Mae.
Jumbo mortgages are mainly designed to finance houses in local, highly competitive real estate markets and luxury properties. Moreover, jumbo loans come with unique tax implications and underwriting requirements. Your score can range from 300 to 850 depending on several factors.
How does a Jumbo Loan work?
Just like conventional mortgages, the minimum requirements for a jumbo loan have been becoming stringent since 2008. Apart from stellar credit history and credit score, you will have to prove that you have accessible cash with you to cover your payments. The payments in the case of a 30-year fixed-rate jumbo mortgage are likely to be very high.
Specific reserves and income level requirements will depend on the overall loan size, but borrowers of jumbo loans will need W-2 forms from the past two years and 30 days of pay stubs. Moreover, the income requirements are higher in the case of self-employed individuals: at least 2 months of current bank statements and 24 months of returns. Borrowers must also have provable liquid assets and cash reserves equivalent to 6-12 months of the jumbo mortgage payments to qualify for a jumbo loan. Moreover, all applicants for a jumbo mortgage must provide proper documents on all existing loans, income, can’t reserves, liquid assets, and non-liquid assets ownership.
What are the requirements for a jumbo loan?
Your credit score is a numerical rating that proves your reliability as a borrower and acts as a major factor when opting for a jumbo mortgage. To get a jumbo loan, you will need a credit score of 700 or above with a very low debt-to-income ratio. The debt-to-income ratio should be less than 43% and preferably near 36%. Although jumbo loans are nonconforming mortgages, these still must meet the guidelines of a “qualified mortgage” as laid down by the Consumer Financial Protection Bureau.
Down Payment on a Jumbo Mortgage
In the past, lenders of jumbo loans used to ask for 30% of the purchase price of the property as a down payment. Fortunately, the requirements for a downpayment on a jumbo mortgage loan have loosened over time. Now, the figure for the down payment has fallen to 10%-15%.
Advantages of a Jumbo Loan
The primary benefit of a jumbo loan is that the borrowers can avail of a mortgage that exceeds the FHFA limits. This limit varies by country and state. The conforming loan limit is set by the FHFA on an annual basis for different areas. The limit has been set to $726,200 for 2023 for most of the country.
The FHFA has other loan limit calculation provisions for areas outside of the continental US. The baseline limit for a jumbo mortgage in Guam, the U.S. Virgin Islands, and Alaska as of 2023 has been set to $1,089,300.
Who Should Avail of a Jumbo Loan
How much you can borrow generally depends on the property value that you are eyeing to buy, your asset value, and your credit score. Jumbo loans are considered ideal for high-income groups of people earning $250,000 to $500,000 annually. This segment is not known as high earners, not rich yet (HENRY). These people make a lot of money yearly but haven’t yet accumulated millions of asset values or extra cash. Such individuals usually have higher credit scores and established credit histories than home buyers opting for conventional loans for a lower amount.
Financial Institutions would offer jumbo loans and long-term loan products to only such individuals.
Jumbo Loan Rates
Jumbo loans used to have higher interest rates than traditional mortgages in the past but the gap has been reducing in recent years. Today, the APR (Annual Percentage Rate) for a jumbo loan is often at most with traditional mortgages and can be even lower in some cases. For example, as of Dec.18, 2022, Wells Fargo charged an Annual Percentage Rate of 6.190% on a 30-year fixed-rate conforming mortgage and 5.473% for a 30-year term on a jumbo loan.
Even though GSEs (government-sponsored enterprises) can’t handle them, these loans are usually securitized by other financial institutions. Since jumbo loans come with a higher risk thru trade at a yield premium to traditional securities loans. However, this spread has now been reduced with the loan interest rates themselves. You can plan your finances using a fire calculator.
Concluding Thoughts
While jumbo loans allow you to avail of loans higher than the limit set by the FHFA, it also requires you to undergo a rigorous credit check. Approval requires a very low DTI (debt-to-income) ratio and a stellar credit score. If you meet all the income and credit requirements, you will be granted a jumbo loan by the lender.