Jumbo loans are larger loans meant for home purchases totaling over $766,550. Homes that exceed the local conforming loan limit will require financing through a jumbo loan. Because jumbo loans are considered a greater risk for lenders, they are generally more challenging to obtain. Knowing what to expect from the process can help borrowers get the funding for a large home purchase.
About Jumbo Loans
Learning about a jumbo loan is essential for borrowers seeking more expensive properties. Jumbo loans are much riskier for lenders because Fannie Mae or Freddie Mac cannot guarantee them. In these loans, the lender is unprotected should the borrower default. Jumbo loans are portfolio-type loans and remain with the original lender because they cannot be sold.
Jumbo loans work the same way as conventional loans, but the stakes are higher because of the more significant amounts. Depending on the borrower’s financial condition and desires, these loans can offer 30-year terms or lower. Not all lenders offer jumbo loans, considered more of a niche loan. Borrowers needing jumbo loans should consider seeking lenders that specialize in them.
What Are the Jumbo Loan Requirements?
As with any loan, jumbo mortgage options have specific approval requirements. The underwriting criteria for these loans are generally much stricter than those for conforming loans, and they require a more substantial down payment. Consider the following requirements for loan approval.
Increased Down Payment
The down payment requirements vary among lenders and according to the borrower’s financial situation. The minimum is usually 10% but can go higher than 20%.
Higher Credit Score
Lenders want to minimize their risks as much as possible when approving jumbo loans. They demand a higher credit score than conforming lenders, usually at least 700 or above. Higher credit scores benefit borrowers and help them lock in lower interest rates.
Debt-to-Income Ratios
Lenders will consider the borrower’s debt-to-income ratio before approving a jumbo loan application. Many jumbo lenders refuse to approve borrowers with percentages over 43%, and they prefer lower ratios.
Cash Reserves
Jumbo lenders want to know if borrowers have cash reserves and are more likely to approve borrowers whose bank accounts have ample cash. Lenders frequently ask borrowers to show proof of enough cash reserves to cover at least one year of their mortgage payments.
Extensive Documentation
Jumbo loan lenders expect much more documentation than conforming lenders. Borrowers must prove their financial health to the lender by offering tax documents, W2s, bank statements, and information on investment accounts. Preparing these documents before applying can help borrowers save time and aggravation, making the approval process more streamlined.
Home Appraisals
Unlike conforming lenders, jumbo loan providers often require more than one home appraisal. The lender wants to ensure that the home is worth the purchase price to offer the proper loan amount, so jumbo lenders may be particular about the appraisals they will accept.
Jumbo Loans Offer Advantages to Borrowers
Borrowers searching for jumbo loans can obtain welcome advantages from lenders, including potentially lower interest rates. Like conforming loan providers, competition can benefit borrowers, helping them lock in lower interest rates.
Another advantage of this loan type is the many options available. Borrowers can choose the terms that best suit their needs, including adjustable and fixed rate options. Former service members can also obtain jumbo VA loans.
Borrowers needing larger loans should consider their jumbo loan options. Shop around for the best terms to save money on large home purchases.
