The ins and outs of applying for a jumbo loan

If you're in the market for a new home, chances are you've done your research. Buying the home of your dreams is so much more than finding the right one, especially if you're planning on buying a high-value property. Before you can put in an offer, you have to consider financing. In fact, most sellers will require proof of pre-qualification before they consider an offer.

While most mortgages are sold to Fannie Mae and Freddie Mac, these are subject to limits set by the Federal Housing Finance Agency (FHFA). Jumbo mortgages are designed for borrowers looking to secure financing above conforming lending limits. Because these loans carry a higher risk to the lender, the application process will look a little different.

Should you apply for a jumbo mortgage?

As house prices continue to rise, more and more buyers are turning to jumbo loans. In most markets, if the loan amount for your home is over $726,200, you cannot qualify for a conforming loan. (If the property is a 2-4 Unit and/or is in a High Cost Area, limit is higher than that of a one unit property in a non-High Cost area). Jumbo mortgages are usually the easiest and most straightforward option in this situation. If you're uncertain what  mortgage type is right for you, an experienced Home Lending Advisor can explain your options.

Jumbo qualification basics

With any mortgage, you must meet basic lending requirements. These requirements are in place to help the lender determine whether you have the means to meet the loan terms. All loans carry a certain level of risk for the lender. Because jumbo loans are not sold to Fannie Mae or Freddie Mac, they carry a much greater risk. To offset this, jumbo mortgages typically have stricter qualification requirements.

To qualify for a jumbo loan, some of the main factors your lender will look at include:

• Your credit score: Expect this to be higher than for a conforming loan.
• Your employment history: Lenders want proof of stable employment. They’ll typically look at how long you have been at your current position and how many jobs you’ve had in the past.
• Cash reserves: Many lenders want to see at least six to twelve months of reserves.
• Debt-to-income ratio: Lenders will compare the amount of your debt to your income to determine how much you can repay.
• Down payment: Down payments vary by lender. In some cases, your lender may require as much as 30%.

The more you can do to prove you have the means to pay back your loan, the greater your chance of qualifying for a jumbo mortgage. Every lender has different requirements, so shop around until you find the one that best suits your needs.

The jumbo application process

Applying for a jumbo mortgage loan isn’t that different from applying for a regular mortgage. There are five main steps to the jumbo mortgage application process:

1. Gather important documents
2. Find a lender
3. Prequalify, find a home and make an offer
4. Apply and get approved for a loan
5. Close on your new home

Because the scale of a jumbo loan is larger, there may be stricter requirements for each phase of the process. Here’s a detailed breakdown of what to expect at each step.

1. Gather important documents

Nobody likes paperwork. However, one of the most common reasons loans are delayed is because applicants don’t have their paperwork ready. The best thing you can do to expedite the application process is gather as much financial data as you can before you apply for the loan. In most cases, this includes:

• Tax returns: Most lenders require at least two years of federal tax statements if you have income other than from your employer. If you filed your taxes online, this can be as easy as logging in and printing out your full return.
• Paystubs:Different lenders have different requirements for how far back your pay records need to go. If you know a home purchase is in the future, start collecting pay statements now. This will prevent you from having to look for or request these documents from your employer at a later date.
• Self-employment records: If you are self-employed, your lender may need additional proof of income. Be prepared to hand over business tax returns, profit and loss statements or annual earnings to complete your loan application.
• Deposit and investment account records: Your lender will let you know which deposit and investment account information they need to see. Start collecting these records now. You may be able to print these records at home.
• Proof of funds: Your lender wants to see you have cash in the bank.  Check with your lender to learn more about their specific requirements.

Don't wait until the last minute to gather your financial records. The last thing you want to do is lose the home of your dreams because you’re waiting for documents.

2. Find a lender

A home is a big purchase. If you don't already have a lender, now's the time to find one. In a competitive market, homeowners may receive multiple offers. Your offer may be more attractive if you can provide a pre-qualification letter.

There are a few things you should consider when you're looking for a mortgage lender:

• How long will the application process take? You’ll want to find a lender that can work within your timeframe
• Where can I apply? If your lender requires you to apply in person, location will be an important consideration.
• What are the minimum requirements? Different lenders have different requirements. Eliminate the ones whose requirements you don't meet.
• What is the current interest rate? This can have a huge impact on your monthly payment.

You’ll be working with your lender a lot over the next few months. Choose someone you’ll be comfortable working with who has the experience to meet your needs.

3. Find a home and make an offer

Time for the fun part! It’s best to start shopping once you’re prequalified for a loan. You don’t want to fall in love with a home only to discover you can't get a mortgage.

If you've ever bought a house, you know you want to come in with a competitive offer. However, you have to be careful about offering too much, even if you can afford it. Most home loans are subject to an appraisal. If your offer is greater than what the property appraises for, the bank may require you to put more money down to approve your mortgage.

4. Get an appraisal

Lenders obtain an appraisal to determine the value of the home you want to buy.

When it comes to jumbo loans, many lenders require two appraisals if your loan exceeds a certain amount, or the original appraisal has expired.

5. Close on your new home

Closing is the final step in the jumbo mortgage process. This is where the lender does a final review to make sure everything is in order before they fund the loan. One of the biggest mistakes buyers make is making a change to their finances just before closing. Don't do this. A large purchase or a sudden withdrawal can completely derail your application.

At this stage, it's normal to experience a longer wait time. Jumbo mortgages are high-risk loans and often require extra verification steps. If you have questions, don't be afraid to reach out to your lender.

A few tips to make your jumbo loan easier and more affordable

Buying a home should be a fun and exciting process. There are a few things you can do to make the jumbo application experience easier:

1. Keep an eye on your credit report. Check your score early and often. Your credit score won't go down when you check your report, but it can when your lender does. Make your payments on time and don't finance any big purchases before you apply for a loan.
2. Lock in your rate. Mortgage rates can change considerably in just a matter of days. If rates are good, lock in your rate.
3. Shop around. Interest rates and closing costs can vary greatly between mortgage providers. It's okay to talk to a few lenders before you make a final decision.
4. Verify your information. This may seem simple, but it's important to make sure everything is correct on your application.

Obtaining a jumbo loan doesn't have to be a complicated process. The more prepared you are, the smoother the transaction can go. If you have questions or are ready to start the jumbo mortgage financing process, contact a Home Lending Advisor.