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- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Jumbo Loan
Most people are aware that there are a couple of options in the mortgage market in terms of the types of loans you can get.
The first major difference is whether you are getting a conforming loan or a jumbo loan.
Conforming loan are the loans which are within the loan limits set by Fannie Mae and Freddie Mac.
But what if you are looking to buy a house with a loan amount more than this limit? That is where a jumbo mortgage comes into the picture.
In this post, we will understand what is a jumbo loan and other things associated with it.
What is a Jumbo Loan?
These are also called non-conforming loans. The conforming loan limits get reviewed each year by the federal housing financing agency (FHFA).
Generally, the limit will stay the same or increase. Back in 1980, the limit was ninety-three thousand seven hundred and fifty dollars for a single-family home.
Today in 2020, the limit is set to five hundred ten thousand and four hundred dollars.
This limit can be higher in some parts of the country such as California or New York.
Any loan which is above this limit would be considered a jumbo loan.
You can also check the conforming loan limits for 2020 on www.loanlimits.org in your area or state.
The limits from 2006 to 2016 held steady at four hundred seventeen thousand dollars, however, the last four years have seen a steady increase.
You need to keep in mind that these are based on loan limits and not the purchase price.
If you are purchasing a million-dollar home with a five hundred thousand dollars down payment your loan would still be considered as a conforming loan.
Why is the conforming loan limit important?
Since the conforming loans set the standards for the mortgage market, once the loan is non-conforming, lenders can cherry-pick what they want to see in a borrower.
They do adopt some of the standards as the conforming loans, however, a non-conforming loan is going to more strict guidelines.
The reason for this is that the investor has to hold on to this debt and cannot sell it in the secondary market as it is not backed by Fannie Mae or Freddie Mac.
The investors can still sell your mortgage but it would be more like a private transaction.
This higher risk creates a more conservative and opinion based underwriting process on what they want to lend you.
About 67 to 70 % of the mortgages are underwritten to Fannie and Freddie rules each year.
This allows the loans to be sold to them and Fannie Mae and Freddie Mac will package those loans and sell them as mortgage-backed securities which are very similar to bonds.
However, Fannie and Freddie will only purchase those loans if they are within the conforming limits.
If the loan limit exceeds the conforming limits it is no longer backed by Fannie and Freddie making the investor hold this mortgage debt as they cannot be sold to Fannie and Freddie.
What are the Qualification Requirements for a Jumbo Mortgage?
Income
Let us start with Income for our qualification section. If you are looking to get a mortgage over $510,400, it is safe to assume that you have a fairly sizeable income.
The lender would require to look at your past two years of income. Stability with the same job and income type is going to be heavily preferred.
Any gaps in employment will be hard to overcome unless they are fairly brief.
If you have recently started your job, they may require you to be employed with them for a certain period of time.
Apart from your stable income if you have any variable income they might want to look at the past two years of income history to check stability and also see if that income will be continued till the foreseeable future.
Credit
If the lender is going to lend you a large amount of money and they cannot easily sell your loan in the secondary market, your credit history is going to play a huge factor in predicting the likelihood to repay the debt.
Jumbo mortgage is going to have the strictest credit score requirements.
If you have a credit score below 700 you might find it difficult to qualify for the jumbo loan. Ideally, you want your credit score to be 720 or higher.
The lender will pull your credit and review all three bureaus. Generally, they will use the middle of the three scores.
The lender may require you to have a minimum of three tradelines.
Your debts would help the lender to calculate your debt-to-income ratio which in the case of jumbo loans is at 43% max, depending on the lender.
Assets
Just because you make a lot of money doesn’t mean that you have a lot of money saved up.
The lenders want to see that you have a decent backup to fall back on.
They would not only verify the amount is enough for the down payment and closing costs, but they are also would like to see additional wealth which is also called reserves.
The general rule of thumb would be that you need to have at least six months of the new monthly mortgage payments in reserves.
Conclusion
Jumbo loans can be very strict and some of the down payment options that are allowed on the other mortgage types may not be allowed on a jumbo mortgage.
Be sure to check with your lender for all the requirements before you apply for a jumbo loan to ensure that you can provide all the documents that are required to be qualified.
