Have you heard the term jumbo mortgage loans and wondered what they were? These loans are basically a larger version of your standard conventional loan. Typically, the maximum loan amount for a conventional loan is $417,000. Any loan amount above that, unless you live in a high-cost area where the conventional loan limit is higher, is a jumbo loan.
The Major Difference
Aside from the loan amount, one of the largest differences of jumbo mortgage loans is the entity behind the loan. Fannie Mae and Freddie Mac back up standard conforming loans; however, they do not back up jumbo loans. Instead, smaller local banks are the best source for the larger loans. Because the secondary market does not see these loans, the bank offering the loan can create their own requirements.
Higher Down Payments
One vast difference you will notice with jumbo loans is the amount of the down payment you will need to put down. There is not a straightforward program, like FHA loans that state you must put down 3.5% across the board. Instead, every lender will determine the amount they require borrowers to put down. The amounts often vary between 15 and 30 percent, but any lender can require what they think is fair and reduces their risk. Because you receive such a large loan amount, the lender needs to ensure that you have your own investment in the home. This way you will do whatever it takes to continue to make your payments, rather than just walking away from the home.
Higher Credit Scores
Conforming loans require fairly high credit scores for approval. Jumbo mortgage loans require even higher scores, again because of the level of risk they pose. If you have a fair or poor credit score, you can pretty much guarantee that there will not be a lender that will give you a jumbo loan. The lenders want to see great credit history and financial responsibility. This means that you did not overextend any of your credit lines; they prefer to see any revolving accounts at no more than 30% of the credit that is available to you. They also want to see a solid payment history on any credit you have outstanding.
Reserves are Required
Reserves are not always a requirement to qualify for a mortgage loan. Even conforming loans do not always require reserves. Jumbo loans, on the other hand, almost always require reserves in order to qualify for the loan. This is another factor that helps the lender determine that you will keep up with your payments. Because of the loan size of the jumbo loan, your payment will be higher than a standard mortgage. In order to ensure that you can continue to pay that amount, the lender will count your assets and determine how many months of your mortgage payment you could cover. Typically, they want to see between six and twelve months’ worth of reserves on hand in order to qualify.
Two Appraisals for Jumbo Mortgage Loans
In some cases, you might also find that in order to qualify for jumbo mortgage loans, you must secure two appraisals. This might seem odd since one appraisal should suffice, but it is done in order to protect you as well as the bank. Every bank has their own threshold regarding the appraisals, but in general, they want the two appraised values to come in within 5% of each other or thereabouts. This helps the lender know without a doubt that the home is worth the value you purchase it for and that they will not be stuck with this expensive home on their hands in the future because you got in over your head and the home is underwater (the mortgage is larger than the value).
Basically, every requirement that pertains to conforming loans is enhanced for jumbo mortgage loans. You must present very little risk to the lender in order to qualify, which makes sense since it is such a large loan amount. If you plan to purchase a home that is worth more than $417,000, you should have good credit, solid income, and plenty of reserves. If you don’t, you could be getting in over your head, which is exactly what the new Qualified Mortgage Guidelines tries to prevent in order to avoid an abundance of foreclosures.