A jumbo home loan is similar to a standard mortgage loan, only with a few noticeable differences. A jumbo loan is what it implies: large! This type of loan is bigger than the loan limits set by the Federal Housing Finance Agency (FHFA). It’s not the type of loan that can be guaranteed, purchased, or secured by loan servicers like Fannie Mae or Freddie Mac. A jumbo loan serves the purpose of financing luxury homes, often in the echelons of the millions to tens of millions of dollars.
Since it has such a large cost tied to it, there are some pretty specific components that tie in and that one must factor in. There are unique and specific requirements in the underwriting department, and there are also specific details related to taxes. Since the housing market has been climbing upward, these types of loans have been gaining popularity.
What It Is and What It Is Not
It is a specialized loan that allows individuals with very good credit scores and significantly low debt-to-income (DTI) ratios a financing option for buying luxury properties. In addition to having a low DTI ratio, the individual or individuals applying for this loan type will need to have considerable assets—not necessarily just liquid—significant enough to cover their jumbo home loan should they default.
There isn’t one specific maximum set by the federal government, but the value of a jumbo loan will vary by state—and can even vary by county. The FHFA does, however, designate a conforming loan limit for most of the country, and in 2019, that limit was $484,350. The 2020 limit is $510,400. For parts of the country where there are higher home values, the conforming loan limit (in 2019) was actually $726,525, or 150% of the limit for the majority of the country.
How the Jumbo Home Loan Works
If you’re in the market for a new home, and the property that you have in your sights is above the half-million-dollar mark, assuming you don’t have that in the bank, you will probably have to apply for a jumbo loan. The application for a jumbo home loan has a lot of requirements, and it’s a much more rigorous process than if applying for a standard loan.
There’s naturally more risk involved with a higher loan amount, and lenders are going to want to make sure the funds are secured since neither Fannie Mae nor Freddie Mac is able to guarantee it. This will be done through the credit check process with your DTI and assets or other forms of collateral that you put up to secure it.
You will need to have extremely good credit—with a score of 700, even 720, or better. Since the housing fiasco of 2008, the regulations around this type of loan have become more stringent, so as to avoid any foreclosures or other repayment issues. As far as the debt-to-income ratio goes, you will need to have a DTI of 43% or lower, and you’ll have an even better chance of being approved for a jumbo home mortgage if your DTI is closer to the 36% mark or lower.
Lastly, you will need to prove that you have enough access to immediate cash to make your payments. These payments will likely be quite high if you select a 30-year fixed-rate loan. While there are individual factors to run during the application process (like an individual’s personal income and the amount they have on hand), all applicants will need to provide W-2s from the previous two years and a pay stub that covers the last 30-day period.
For an individual who is considered self-employed, there are even more requirements. You need to provide 60 days’ worth of statements demonstrating your bank balance, in addition to the two years of income taxes. The borrower will also need to show that they have enough of a liquid asset reserve to qualify and at least six months of cash reserves equal to the amount of the mortgage payments.
How Is It Different from a Standard Mortgage Loan?
The jumbo loan differs from a standard mortgage loan mostly in relation to the steep price tag and “luxury” classification of the property. A jumbo loan may also be relevant if the borrower lives in an extremely competitive housing market.
A standard home loan is just that—it works with the needs and eligibility of the average borrower. This loan type is insured by the Federal Housing Administration and will be guaranteed by Fannie Mae or Freddie Mac because it’s under the maximum limit of $510,400, discussed above. Because of this, a standard mortgage can be either “conforming” or “non-conforming.”
Fannie Mae and Freddie Mac occupy themselves with this sort of home loan because they can purchase, repackage, and resell nearly any mortgage as long as it’s categorized as a conforming loan type. Again, these factors are decided by a borrower’s creditworthiness, the history of their purchases and payments, plus their DTI ratio. Additional factors considered in standard mortgages include both the mortgage’s loan-to-value ratio (which has to do with the rate at which the home is appraised before the loan paperwork is processed) and just how much money is actually needed for the mortgage loan.
Conforming loans are changed and adjusted annually so that they can move in line with the average price of a home in the US, so that means that when housing prices go up, the loan limits will be adjusted by a percentage value that corresponds to the amount.
If you’re in the market for a jumbo home loan and want to discover the current eligibility requirements and rates for such a loan, please contact the experts at Rivermark Community Credit Union today so we can help make your dream home yours.