Jumbo loans are those that exceed the limits of Fannie Mae or Freddie Mac loans since they are the two entities that purchase a majority of the loans written. This means in most areas, conforming loan limits are $417,000. There are a few areas where the maximum is increased to $625,000 before jumbo loan rates hit because of the cost of living in the area. Regardless of the area you live, however, obtaining a jumbo mortgage is much harder than it is to obtain a conforming mortgage. There is a much higher level of risk for the bank, which means they need to be stricter in who they provide these loans to in order to avoid default down the road.
Jumbo Loan Credit Requirements
The standard guideline for all jumbo loans regardless of the bank providing them was a credit score no lower than 740. That is a fairly high credit score that was hard for many people to achieve in the wake of the economic downfall. With that being said, jumbo loans began to dissipate, putting lenders in a bind. They slowly began to lower the credit requirements, going down to a credit score of 720, but even that has slowly started decreasing – credit scores of even 680 are being allowed. Of course, this does not come without other requirements. In order to make up for a lower credit score, borrowers need to have other compensating factors.
- Down payments – The minimum down payment required for your particular jumbo mortgage will depend on your credit score. Typically (every lender differs) a score of 740 or higher will only require a down payment of 10 percent. As the credit score decreases, the amount of the required down payment increases. If you are looking at a credit score of 680, you can guarantee that you will need to put down at least 20 percent, if not 30 percent on the home.
- Reserves – Every jumbo loan needs to have reserves and every bank will have their own requirements. In general, however, 3 months’ worth of principal, interest, taxes, and insurance suffice for getting the loan unless you have a lower credit score. Even a credit score of 700 can make it necessary to have 6 months to 1 years’ worth of reserves on hand. These reserves need to be in a liquid account (checking, savings, or a short-term CD in order to count). The reserves need to be in excess of the money you are using for your down payment as well.
- Debt-to-Income Ratios – In general, the lower your debt ratio, the better your chances are of getting a jumbo loan. This is especially true if you have lower credit scores. A low debt ratio can be considered a compensating factor because it shows the lender that you do not have excessive debt obligations out there that would interfere with your ability to pay the large mortgage payment. If your credit score is low because of an occurrence that was out of your control and you show complete responsibility with your outstanding credit moving forward, it could work to your advantage.
The good news is that banks like Chase and Wells Fargo are increasing the number of jumbo loans they are offering by lightening up their requirements slightly. This does not mean they are going to be lenient by any stretch of the imagination, however. You will still be subject to a large number of verifications and back-and-forth with the lender. They will want to make sure that every base is covered when proving that you can afford the loan. With the latest mortgage regulations in place including the Ability to Repay Rule and the Qualified Mortgage Rule, lenders need to protect themselves by being overly cautious when it comes to providing loans. They need to know without a doubt that you can afford the payments on the loan without struggle and they need to be able to prove that or they open themselves up to the possibility of litigation if you were to default.
If your credit scores have not quite increased as much as you would like after coming off of the economic turndown and you want a jumbo loan, you do not have to give up hope. You do, however, have to make sure that your credit history is clean for the last 12 months and that all other factors are in place, including stable income, adequate assets for a down payment and reserves, and a decent debt ratio.