Whether you need more space or you're ready to scale up from your starter home, purchasing a higher priced property includes a few more requirements than you might expect. If you're considering a home loan over the current conforming limit, you'll need to meet the requirements to take on a jumbo loan.
Since jumbo loans are larger than a standard conforming loan, you need to understand what they are, how you can get one and what steps you should take to strengthen your finances. In every homebuying journey, the first course of action is determining whether you can comfortably take on a jumbo mortgage.
What is a jumbo loan?
A jumbo loan is a large loan with risks for both the lender and the buyer. In general, a jumbo loan is for an amount equal to or greater than the current conforming loan limit in your areas. These loans are not eligible for sale to Fannie Mae and Freddie Mac and aren’t subject to their standards.
As a result, lenders may have stricter requirements around qualification.
How to qualify for a jumbo loan
A jumbo mortgage is a big undertaking, and ensuring financial readiness is one of the biggest steps you’ll take before moving on to final paperwork.
Here are the requirements you'll generally need to meet when applying for a jumbo mortgage:
- High credit score
- A sizeable down payment
- Lower debt to income (DTI) ratio
- Lower loan to value (LTV) ratio
- A higher amount of reserves
- Documentation including tax returns, pay stubs, bank statements and more
Your credit score is a measurement of your creditworthiness. Based on a combination of total debt, number and age of open accounts, repayment history and more, your credit score is an analysis of how likely you are to pay your debts. If you're applying for a jumbo loan, you'll likely need a high credit score, though the minimum does vary by lender.
The higher your number is, the more likely the lender will consider you’re able to pay your mortgage in a timely and consistent manner. Since jumbo loans come with a higher price tag than conforming mortgages, a satisfactory good credit history can help you get approved.
Even with an exceptional credit score, you’ll need cash for a down payment. Down payments can vary in the case of conforming loans, but they are generally higher for jumbo loans. As a general rule of thumb, you can expect to make a down payment of at least 10% on your jumbo loan. Some lenders may require a minimum down payment of 25%, or even 30%. While a 20% down payment is a good benchmark, it’s always best to talk to your lender about all options.
Putting down a larger portion of your home purchase price reduces your total loan amount. Saving for a larger down payment can also help you secure a better interest rate and lower your monthly mortgage payments
Debt to income (DTI) ratio
Your debt to income ratio is calculated by dividing your monthly debts by your gross monthly income. This number is a good indicator of how much debt you can reasonably handle. It's also a key indicator of how risky approving your loan might be for a lender.
DTI is a standard metric for conforming loans and non-conforming loans alike, but the standards are tougher if you're hoping to secure a jumbo mortgage.
Loan to value (LTV) ratio
Your Loan to value ratio (LTV) is the percentage of the home's value that your loan covers. The calculation is the balance of your mortgage divided by the lesser of the sale price or appraised value of the property.
Your LTV goes hand-in-hand with your down payment and the lower you can get it, the better your chances are for being approved for a jumbo loan.
Reserves will likely be a key factor when you're applying for a jumbo loan. Reserves are the assets accessible to you after you close on your mortgage. This could be the money in your emergency fund or savings account, or investments. If you have a healthy financial cushion, you'll be one step closer to approval.
Lenders commonly ask borrowers to prove they have a higher amount of reserves. As always, demonstrating how reliable and low-risk you are as a borrower is key to getting a jumbo loan.
Proving your financial stability will come down to more than your bank statement. Along with your typical proof of identity, you’ll also need to provide proof of income, tax returns, paystubs, W-2s and information about your investments and other financial interests.
Transparency is everything when you're applying for a loan. Readily providing your documentation not only shows your confidence as a borrower, but also proves your financial stability.
Am I financially ready for a jumbo mortgage?
While each of these items is not necessarily required in all cases, using the whole list can serve as a financial benchmark to measure of your jumbo loan readiness.
Even if you've checked off every box, the most important thing to understand is what your monthly payments will look like once everything is said and done. You'll know if you're financially ready to take on a jumbo mortgage if the monthly cost fits comfortably into your budget.
How can I improve my readiness to take on a jumbo loan?
Financial literacy and stability are the keys to successfully taking out a jumbo loan. If you're interested in improving your financial readiness, use an affordability calculator to set your budget. Here are a few other steps to help jumpstart your financial readiness:
- Save a consistent amount each month
- Create a strict monthly budget with an eye toward long-term goals
- Reduce personal expenses
- Track your credit score and work on proven ways to improve your numbers
- Meet with a financial advisor to focus on actionable steps toward financial growth
Remember, it all starts with a hard look at your financial habits. Build a solid foundation of financial preparedness and understanding first. Once you feel confident contact a Home Lending Advisor to get started.