What Is a Jumbo Loan?
Whether you have a large family and need room for everyone, or your Houston dream home is in a more expensive city or neighborhood in Houston, you will likely need to borrow a sizeable amount of money. Conventional lenders are subject to limitations on the amount of money they can lend. Unless you have the available cash to place a down payment that would reduce the principal borrowed, you may not be eligible for a conforming loan.
A jumbo loan is one where the amount borrowed is more than the conforming loan limits defined by the Federal Housing Finance Agency (FHFA). In 2020, the loan limit on conforming loans is $510,400 in most locations. For areas where home costs are higher, the 2020 limit is $765,600. Unlike conventional loans backed by government programs such as FHA, Freddie Mac, or Fannie Mae, jumbo loans are issued by private lenders.
While there are some standard guidelines and requirements for jumbo loans, there are many variables. You need a lender like Rock Mortgage, experienced with Texas jumbo loans, that can guide you through the process so that you understand your options.
Your Complete Guide to Jumbo Loans
Types of Jumbo Loans
1- Home Purchase
The terms and requirements for the purchase of a single-unit home will vary from multi-unit dwellings. Check with your lender for the options based on your loan request, down payment, and other requirements.
2- Rate or Term Refinance
The amount of equity you must have in the home will vary with the loan amount. For example, you would be required to have a minimum of 20% equity for a loan of up to $1.5 million and 40% to borrow up to $3 million.
3- Cash-Out Refinance
The amount of cash you can take from a refinance depends on the amount of equity in your home. You must maintain a minimum amount of capital based on the loan amount.
- Under 40% equity in your home = up to $350,000 cash
- Between 40% and 50% equity in your home = up to $500,000 cash
- 50% or more equity in your home = up to $750,000 cash
4- Investment Property
You may get a jumbo loan for investment properties of 1-2 units with a 40% down payment or equity for a loan up to $1 million.
You may get a jumbo loan for homes with land up to 40 acres. However, special conditions apply when the amount of land exceeds 20 acres.
- It requires 10% additional down payment
- The appraiser must have two comparable properties within 5 acres of the property you want to buy
- The value of the land must not exceed 35% of the combined value of the house and land
Jumbo Loan Requirements
1- Debt-to-income ratio (DTI)
There is a stringent limit on the debt-to-income ratio to qualify for a jumbo loan of 43%.
2- Credit score
When it comes to your credit, in order to qualify for a jumbo loan, you must have a FICO score above 700.
If your loan will exceed $1 million, you may or may not need to obtain two separate appraisals. If it exceeds $2 million, you must get two appraisals.
4- Cash reserves
You must be able to show evidence of at least six months of available cash reserves to qualify. The reserves must equal the principal, interest, taxes, and insurance (PITI) payment on your loan.
A typical downpayment for a jumbo loan is 10%, but it could be as high as 20% for a home loan.
6- Interest rates
Since jumbo loans are not guaranteed like FHA, Fannie Mae, and Freddie Mac loans, lenders must offset the higher risk with higher interest rates as compared with conforming loans.
7- Loan limits
Since loan limits vary with the area and the year, consult with a licensed loan officer to see if you require a jumbo loan. For 2020, the cap for conforming loans is $510,400, and going up to $765,600 in some areas.
How JUMBO Loans Houston Work
If you have your eyes set on a home that costs significantly more than $500,000, you may need to work with a mortgage company Houston that specializes in jumbo loans. While the right lender can help you access the money you need, know that the process for acquiring such a large loan will be much more rigorous than that associated with a typical mortgage. This is because jumbo loans carry much more risk for lenders than traditional mortgages, as Freddie Mac or Fannie Mae does not back them, and they involve much more money.
As with traditional mortgages, the lending requirements for jumbo loans have become increasingly stringent since 2008. In addition to a stellar credit score of 700 or higher, you must have a very low debt-to-income ratio. While some lenders will accept a DTI of 43%, you should aim to reduce your debt load so that it is no more than 36% of your monthly income.
If you meet the credit requirements, you must then complete the cash and income requirements. Mortgage lenders Houston wants to see that jumbo loan applicants have enough cash on hand to cover monthly payments, which are likely extremely high. While the specifics will depend on the size of the loan you plan to take out, be prepared to present at least two years of tax returns and 30 days of paystubs. If you are self-employed, you’ll need to show at least 60-days’ worth of bank statements. In addition to sizeable savings, the lender may also require you to have provable liquid assets. To qualify, the value of your cash reserves and liquid assets must be enough to cover at least six months of mortgage payments.
Down Payment Requirements for JUMBO Loans Houston
In the past, mortgage lenders required a 30% down payment on jumbo loans. Fortunately, that is one requirement that has loosened up in recent years. Some lenders are willing to accept a down payment as low as 10% to 15% of the home’s purchase price. However, while you could save money upfront by putting down a lower down payment, it will cost you more in the long run. A down payment of 20% can help you avoid private mortgage insurance and reduce your interest on the loan.
The Profile of a JUMBO Loan Applicant
Jumbo loan applicants typically fall into a very specific demographic. These individuals usually fall into the segment financial advisors refer to as “HENRY” — high-income earners, not rich yet. They make between $250,000 and $500,000 per year, but they are not at the point in their lives where they have amassed a large amount of wealth yet. They also have strong credit profiles with high scores and long-established credit history. Finally, individuals in the HENRY segment have robust retirement savings to which they have contributed for years.
If you fit the bill of a jumbo loan applicant and meet all the requirements above, and if you have your eye on a home that’s value exceeds conventional mortgage limits, talk to one of our lenders about JUMBO loans Houston. Call us at (832) 230-3067 or send us a message online.