Why Get a Jumbo Loan?
Designed to finance luxury properties and homes in highly competitive local real estate markets, jumbo mortgages come with unique underwriting requirements and tax implications. These kinds of mortgages have gained traction as the housing market continues to recover following the Great Recession.
How much you can ultimately borrow depends, of course, on your assets, your credit score, and the value of the property you’re interested in buying. These mortgages are considered most appropriate for a segment of high-income earners who make between $250,000 and $500,000 a year. This segment is known as HENRY, an acronym for high earners, not rich yet. Basically, these are people who generally make a lot of money but don’t have millions in extra cash or other assets accumulated—yet.
"A jumbo loan, also known as a jumbo mortgage, is a type of financing that exceeds the limits set by the Federal Housing Finance Agency (FHFA).
How a Jumbo Loan Works
If you have your sights set on a home that costs close to half a million dollars or more—and you don’t have that much sitting in a bank account—you’re probably going to need a jumbo mortgage. And if you’re trying to land one, you’ll face much more rigorous credit requirements than homeowners applying for a conventional loan. That’s because jumbo loans carry more credit risk for the lender since there is no guarantee by Fannie Mae or Freddie Mac. There’s also more risk because more money is involved.
Down Payment on a Jumbo Loan
Fortunately, down payment requirements have loosened over the same time period. In the past, jumbo mortgage lenders often required home buyers to put up 30% of the residence’s purchase price (compared to 20% for conventional mortgages). Now, that figure has fallen as low as 10% to 15%. As with any mortgage, there can be various advantages to making a higher down payment—among them, to avoid the cost of the private mortgage insurance lenders require for down payments below 20%.
What are the Requirements for a Jumbo Loan?
Just like traditional mortgages, minimum requirements for a jumbo have become increasingly stringent since 2008. To get approved, you’ll need a stellar credit score—700 or above—and a very low debt-to-income (DTI) ratio. The DTI should be under 43% and preferably closer to 36%. Although they are nonconforming mortgages, jumbos still must fall within the guidelines of what the Consumer Financial Protection Bureau considers a “qualified mortgage”—a lending system with standardized terms and rules, such as the 43% DTI.
You’ll need to prove you have accessible cash on hand to cover your payments, which are likely to be very high if you opt for a standard 30-year fixed-rate mortgage. Specific income levels and reserves depend on the size of the overall loan, but all borrowers need 30 days of pay stubs and W2 tax forms stretching back two years. If you’re self-employed, the income requirements are greater: Two years of tax returns and at least 60 days of current bank statements. The borrower also needs provable liquid assets to qualify and cash reserves equal to six months of the mortgage payments. And all applicants have to show proper documentation on all other loans held and proof of ownership of non-liquid assets (like other real estate).
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