When considering buying a new home, choosing a mortgage is one of the most important decisions you will make. For high-value homes, this can be a challenge if the mortgage amount requested exceeds loan limits set by the Federal Housing Finance Agency (FHFA). In some cases, you can get full funding through multiple loans, but this can get complicated and may cost you more in the long run.
Fortunately, jumbo mortgage loans are specifically designed to finance high-value homes that fall outside the limitations set by government-sponsored enterprises Fannie Mae and Freddie Mac. Jumbo mortgages give borrowers the option to use one mortgage to finance their high-value home. However, the increased loan amount and risk for lenders mean borrowers must meet stricter requirements.
Main jumbo mortgage requirements
Since jumbo loan lenders are taking a higher risk, borrowers have to show they are in good financial health. Lenders want to be sure their loans will be repaid even in the event of financial hardship. Three of the primary requirements for jumbo loans are a high credit score, low debt-to-income (DTI) ratio and good cash reserves.
High credit scores
To qualify for a jumbo loan, you need to have a high credit score. Lenders use your credit score to see if you’re financially reliable. A high score helps to demonstrate financial responsibility.
Lenders will review your credit report for any negative items, such as missed or late payments, foreclosures and bankruptcy. If you have either on your credit report, be prepared to have your application denied. It's best to wait until these items have fallen off of your credit report. This could take approximately 7-10 years from the date they were reported for bankruptcy and foreclosure. Regardless of your credit score, foreclosure and bankruptcy will almost always result in a rejection of your jumbo mortgage application.
In addition to your credit report, lenders will look at your debt-to-income (DTI) ratio. Your DTI is the comparison of your gross monthly income to your outstanding debts. If your percentage of debt is high compared to your monthly income, lenders may worry you'll be unable to make your mortgage payments during financial hardship.
If your credit score is not high, a low DTI may make up for it. In addition, a high DTI may be offset if you have high cash reserves or an exceptional credit score.
The third major factor that lenders look at is the amount of cash reserves you have in the bank. Depending on the loan amount, they may ask for proof that you can make your mortgage payments using only cash reserves for a specific length of time.
To be safe, you should be able to show you can cover at least 6-12 months of mortgage payments using the money you have in the bank. Keep in mind, you still need to pay your down payment and closing costs if your loan is approved. You'll need to prove your cash reserves can cover both the closing costs and the mortgage payments for at least 6-12 months.
Jumbo qualification process
Now that you have an idea on if you qualify for a jumbo mortgage, there are documents and inspections needed to prove it. In addition to credit scores, DTI ratio and cash reserve statements, the lender will ask for documented proof of your income and assets and an appraisal to confirm the value of the property.
Lenders often require documentation for proof of income and funds to cover your down payment, closing costs and cash reserves. This usually includes:
- Annual tax returns from the past 2 years, including W-2s
- 30 days of your most recent pay stub(s)
- 60 days of your latest bank statements
- Profit/Loss statement and balance sheet for private businesses and self-employed applicants
- Proof of other income such as commissions, bonuses, investment income and additional deposits
Lenders will obtain an appraisal to verify the property value is correct. They use the appraisal to make sure the value of the property is high enough for a jumbo loan, and to calculate the loan-to-value (LTV) ratio.
The loan-to-value (LTV) ratio is used by mortgage lenders to decide whether to offer a loan, how much will be required for the down payment and what the interest rate will be. LTV ratio is calculated by dividing the loan amount by the appraised value or purchase price of the property, whichever is lower.
The lower the LTV ratio, the better the chance of having a lower interest rate. If your LTV ratio is too high, the lender may decide the value of the property is not worth the loan and refuse to offer financing.
Jumbo down payments and fee
As well as determining your financial health, lenders also look at the effect the down payment and closing fees will have on your finances. Although you may have a sufficient cash reserve to make mortgage payments, you still need to cover the down payment and closing costs upfront.
Since jumbo loans are higher than typical mortgages, the down payment and closing costs are often higher, too.
With the higher principal of a jumbo loan, even a few percentage points can make a huge difference in the amount you pay over time. If you aren't sure how to find this information, don't hesitate to contact a Home Lending Advisor who can help you find the best rate and terms for your jumbo mortgage loan.
Is a jumbo mortgage right for you?
Now that you have all of the information you need to understand jumbo loans, you can decide whether a jumbo mortgage is right for you. To help put everything in perspective, ask yourself the following questions.
Do I have good credit, a low DTI and high cash reserves?
If you answered "no" to any part of this question, you may want to reconsider applying for a jumbo loan. It may be better to wait until you can improve your financial health. You should also wait until any bankruptcies or foreclosures on your credit report have fallen off.
Can I prove I’m in good financial health?
If you can’t provide evidence to show you have sufficient income and cash reserves to cover your mortgage payments, lenders will likely reject your application. Be sure you have collected all important information before beginning your application.
Is the property value high enough?
Work with your real estate agent to estimate the value of the property. If the property value is greater than the amount set by Freddie Mac and Fannie Mae, a jumbo loan may be your best option.
Do I have enough saved?
Since lenders will focus on your ability to cover mortgage payments, make sure you have enough funds for all the costs involved. That includes appraisals, inspections, taxes and your down payment. You will also need reserves of 6-12 months of mortgage payments. Estimate high and don't start the process until you’re sure you have enough money to cover everything.
If you answered "yes" to all of the above questions, a jumbo loan may suit your needs. To ensure you are getting the best deal on your jumbo mortgage, it’s a good idea to speak with a Home Lending Advisor. They can help you apply for a jumbo mortgage, compile and submit documentation and answer any questions you may have about the loan application, closing process and everything in between.