A jumbo loan is any loan higher than the national conforming limit. Today, that means any loan higher than $647,200. If you happen to find a home that exceeds this limit, you may have to apply for a jumbo loan. While it’s not a bad thing, you may need a few more qualifications in order to qualify for the loan.
Are Jumbo Loans Risky?
Lenders think of jumbo loans as risky because of their size. Typically, lenders don’t sell these loans on the secondary market. They keep them on their own books, which means if the borrower defaults, the lender feels the loss immensely. There aren’t any agencies, such as Fannie Mae or the FHA backing them up.
Because of its increased riskiness, you may find that lenders have tougher requirements. Below we help you understand the requirements you may need.
High Credit Scores
Your credit score tells a lender right off the bat if you are a good risk. A high credit score means that you are a good risk and a low credit score generally means that you are a bad risk. While each lender will have their own requirements, typically, lenders want a credit score of at least 700 in order to qualify you for a jumbo loan.
Low Debt-to-Income Ratio
Your debt-to-income ratio is what lenders know that you can cover all of your payments. They will generally look at two ratios – your housing ratio and your total debt ratio. Your housing ratio is the one that compares your total housing payment to your gross monthly income (income before taxes). Your total debt ratio is the combination of all of your debts, such as your credit cards, installment loans, student loans, and new mortgage payment. The lender then compares this total to your gross monthly income.
Again, each lender will have their own requirements, but you can expect lenders to cap your total debt ratio allowance at 43% – 45%. Lenders view this as the ‘safe zone,’ meaning that your risk of default is much lower when your DTI remains in this zone.
Assets on Hand
Unlike standard conventional or government-backed loans, you will likely need assets on hand, or reserves, if you want a jumbo loan. Lenders measure your reserves based on the number of months of mortgage payments you can cover with them. While each lender will have their own requirements, it’s not unusual to need between 6 months – 12 months of reserves on hand in order to get a jumbo loan approval.
Large Down Payment
Aside from the reserves you have on hand, you’ll need money to put down on the home too. Unlike conventional loans that allow down payments as low as 5% or FHA loans that only require 3.5% down on a loan, jumbo loans need down payments as high as 20% – 30%.
Jumbo loans are a big risk for lenders. If they don’t ask for a down payment, they put themselves at risk for loss. Borrowers that have their own money invested in the home are more likely to do what it takes to make their mortgage payment. Borrowers that don’t have much of their own money invested could find it easier to just walk away from the home because they don’t have as much to lose.
The Necessary Documentation
Now that you know how you can qualify for a jumbo loan, you need to know what documentation you need to qualify for it.
Just like a standard loan, you’ll need to prove your income, assets, employment, and credit history in order to apply for the loan. This means providing:
- Your information and consent to pull your credit report
- Proof of your current income with your paystubs covering the last 30 days
- Proof of your annual income with your W-2s for the last 2 years
- Proof of your self-employment income with your last 2 years of tax returns
- Proof of your assets with the last 2 months of bank statements from all accounts that you’ll use
- Contact information for your employer
These are the basic documents lenders require. You may find that a lender will ask for more documentation after reviewing these documents. This is a part of the underwriting process and is how lenders decide if you are a good risk for the loan.
Jumbo loans are a great way to buy a more expensive home than standard conforming loans will allow. Just know that it might take a little more time and verification in order for you to get approved for a jumbo loan and that you should shop around to find the right lender.
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