A jumbo loan is a great way to purchase a more expensive home, but be prepared to go through a rigorous qualification process in order to get it. Lenders do not just hand out these types of loans to anyone because they are significantly riskier than a standard size loan. Jumbo loans are any loans that exceed the conforming loan amount in your area. Unless you live in a high-cost area, that amount is $417,000. Some areas, like San Francisco have higher limits, but those areas are few and far between. Here is what you need to know about jumbo loans and how to prepare.
Assets are a Requirement
Assets play a vital role in any loan – they can act as a compensating factor, helping to make your loan application look better, but they are not always necessary for approval. With the jumbo loan, they are necessary and for a variety of reasons.
The down payment you put down plays an important role in your ability to obtain a loan. Generally, you need to put down at least 20 percent in order to get approved. Of course, the higher your down payment, the less risky your loan becomes and the more favorable terms you get. But because you are taking on such an expensive loan, more than 20 percent can equal a large sum of money. If you know you want to purchase an expensive home with a loan amount higher than $417,000, then it pays to start saving right away.
In addition, lenders will look at the reserves you have on hand after you put down your down payment and pay the closing costs/fees for the loan. At a minimum, most lenders require 3 months of reserves, but most will require more. Reserves mean not only the principal amount of your mortgage, but the taxes, insurance, and mortgage insurance as well. In general, the more months of reserves you have on hand, the less risky your loan becomes. It gives the lender reassurance that you will still be able to pay the mortgage even if something were to change with your income temporarily.
Debt Ratios are Highly Monitored
Your debt ratio is another crucial component of your loan profile. It plays a role in any type of loan, but some loans are able to provide a little bit of leniency when it comes to calculating your debt ratio. There is not a strict maximum that automatically cuts you off if you go over it – although some lenders will enforce this just to decrease their risk level. With a jumbo loan, however, all lenders are very strict. Jumbo means your payment is much higher than it would be with a conforming loan. This means it takes up a large amount of your monthly income. You still need money for other daily living costs and bills, just as you would if you had a smaller mortgage. The lender needs to make sure you have that money in order to ensure that you will continue to pay your mortgage on a monthly basis. Generally, lenders don’t want a front-end (principal, interest, taxes, and insurance) payment higher than 38 percent and a back-end (total monthly debts) payment higher than 43 percent. This means if you want a more expensive home with a higher loan amount, you need to get your financial affairs in order.
Your Jumbo Loan Payment will Change
Jumbo loans generally are not fixed-rate loans. This means the payment can adjust periodically. Most interest rates change yearly after the initial fixed period. For example, a 3/1 ARM jumbo loan has a fixed interest rate for the first 3 years, but then changes annually after that. Because there is no way to predict how the interest rate will change, you need to be prepared with enough savings to make up the difference should your payment increase dramatically. Many borrowers are able to refinance before their adjustable rate mortgage adjusts, but a jumbo loan is hard to refinance because of its loan amount. Generally, you would end up in another ARM unless you have the finances to afford the fixed rate mortgage. When you start the jumbo loan, it is important to think about the future and the affordability of your mortgage.
In general, you need to prepare yourself for quite a different loan process when you look for a jumbo loan. Many lenders hold these larger loans on their own books, rather than selling them to the secondary market, so they can implement their own requirements. The better picture you paint for your financial life, the more likely it is you will get approved. Take the time to get your financial affairs in order, including your assets, income, and debts in order to ensure that you get approved for the loan you need.