If you’re looking to purchase a home on the more expensive side of the spectrum it’s possible that you will need to utilize a Jumbo Loan. This is a mortgage product that exceeds the conforming loan limits set forth by the Federal Housing Finance Agency. In Texas, this loan limit is likely going to be $510,400. Since these loans exceeding the conforming loan limit, they are not guaranteed by Fannie Mae and Freddie Mac which makes them a riskier investment for any lender. In other words, the lender is protected by the Government if the borrower defaults on their home loan. Given these loans are associated with more risk, they are typically more difficult to qualify for and come with a few more stipulations than your typical conventional loan. Here are a few things to consider before deciding to apply for a Jumbo Loan.
Down Payment
If you were planning on putting down a minimal down payment, anywhere from 3% to 10%, you might want to think again. Most lenders are going to require a minimum of a 20% down payment with some allowing you to put down as little as 15%. The rationale here is since this is a riskier investment, the lender wants you to have more “skin in the game” to ensure a default is the last resort for any borrower.
Credit Score
While most conventional loans have a minimum credit score of 620, a Jumbo Loan requires your credit score to be at 720 or greater to qualify. This can be an issue for some as the average credit score in the United States is typically around 708
Reserves
When using buying your home, not only will you have to come up with funds to use towards your down payment and closing costs, you will also need to show have enough reserves on hand to qualify. Depending on the loan amount a borrower will need to provide anywhere from 6-12 months’ worth of housing expenses in reserves. On the plus side, this doesn’t necessarily have to be cash on hand as most lenders will allow you to use funds in retirement and investment accounts to satisfy the requirement.
First Time-Home Buyer Stipulations
If you’re looking to qualify for a jumbo loan on your first home purchase, you’re likely going to have to provide a minimum of 12 months in reserves regardless of your loan amount. Most lenders consider you a first-time homebuyer by definition if you haven’t owned a home in the last 3 years.
Closing Costs
A borrower applying for a Jumbo Loan will also have to have come up with more in closing costs when compared to a conventional loan. Most lenders require 2 appraisals and/or a collateral desktop analysis report to obtain an accurate valuation of the home. Depending on the market, you might even have to pay a discount point to obtain your interest rate, which would further add to your closing costs.
Interest Rate
Depending on the market conditions, you will likely have to settle for a higher rate. More risk = higher rate.
Debt-to Income Ratio
The debt-to-income ratio is the key ratio for any loan product. Most conventional loans have a max DTI requirement of 45%-49.99%. To qualify for this loan product, you’re going to need to make sure your total monthly expenses (including your new mortgage) compared to your monthly income are at 43% or lower. If you happen to qualify for a 15% down payment Jumbo, your DTI needs to be even lower at 36%.
Increased Documentation
If you’ve purchased a home before on a conventional loan, you might be surprised by the increased amount of documentation your lender is now requesting of you. That’s because the underwriting for Jumbo Loan is much more stringent and requires more documentation upfront in order to approve your loan.
That being said, don’t let any of this discourage you. Many people apply and are approved for jumbo loans every day and it can be a great product to allow you to purchase your dream home without having to pay for it in cash. If any of these stipulations might be an issue for you, you might be able to avoid a Jumbo Loan all together and apply for a 1st and 2nd lien mortgage. Many loan officers use this by having the majority of the financing on a primary mortgage up to $510,400 and then utilize a second smaller loan (with likely a higher interest rate) to finance the rest. In either case, your first step should be to talk to a mortgage professional to see what the best course of action would be.
Jumbo Loans for Large Mortgage Amounts | Rock Mortgage — Houston, Texas
