Jumbo loan qualifications aren’t the same as traditional mortgages when it comes to things like credit scores and down payments. So, if you’re in the market to buy a home, here’s what you need to know about jumbo loan requirements before you start the application process.
Jumbo Loan Requirement: Who qualifies?
In a nutshell, a jumbo loan is a mortgage loan that exceeds the conforming mortgage loan limits set by the Federal Housing Finance Agency (FHFA). For 2020, the jumbo loan limit for single-family homes is a loan that exceeds $510,400 in most areas and $765,600 in high-value locales.
To qualify for a jumbo loan, lenders look at the same factors they would if you were applying for any other mortgage loan. That includes things like:
- Employment and work history
- Savings and other assets
- Debt and your debt-to-income ratio (or DTI)
- Credit history and credit scores
Lenders analyze these aspects of your financial health to determine whether you can afford a mortgage and how likely you are to pay it back. But what’s different about jumbo loan requirements is that during the loan application and approval process, those financial benchmarks tend to come under the microscope more than they might with a conventional mortgage.
When looking at credit scores, some lenders may want scores of 640 or better for a conventional loan. But with a jumbo loan, your lender might require a credit score of 700 or better instead. Learn how to build and maintain a good credit score.
Other financial benchmarks lenders may look more closely at are your income and existing debt, zeroing in on your debt-to-income ratio. This number tells lenders how much of your income goes toward debt repayment each month. With jumbo mortgage loans, lenders might cap this at 40%, compared to the 43% DTI or higher that may be allowed with conventional loan options.
So, why do lenders set stricter jumbo loan requirements?
The answer is simple. Jumbo loans involve more risk for the lender. If you borrow $2 million, for example, you’re viewed by a lender as riskier than someone who gets a $200,000 mortgage. So, lenders impose stricter jumbo loan requirements and guidelines to ensure that they only lend to the most qualified buyers as a way to reduce risk.
Jumbo Loan Costs: How much will you pay?
Another key difference between a jumbo loan and a conventional mortgage has to do with the down payment. With conventional mortgages, a 20% down payment is the minimum to avoid paying private mortgage insurance (PMI). HomeReady mortgages are available with a down payment as little as 3%.
With a jumbo mortgage loan, on the other hand, lenders want to see that you have more skin in the game and you may have fewer down payment options. So, while a 20% down payment minimum may be the standard, something to keep in mind is that your lender could require you to put down closer to 30% for a higher value home.
Aside from potentially needing more cash to cover your down payment for a jumbo loan, your lender may also want to see that you have a decent emergency cushion in the bank. It’s possible that mortgage lenders may require you to have anywhere from nine to 12 months’ worth of cash reserves tucked away to help cover home ownership expenses before giving you the green light on a jumbo mortgage.
Closing costs should also be factored in. While a jumbo loan can have the same 3% to 6% closing costs as conventional loans, that can translate to a much higher dollar amount at closing time. For example, with a $1 million mortgage, you may be looking at $30,000 to $60,000 in closing costs alone.
The Rate Difference
Before you apply for a mortgage — especially a jumbo loan — it’s important to pay attention to the interest rate you’ll pay, as well as the annual percentage rate (APR). Your rate influences the total cost of borrowing over time and the lower it is, the better.
In terms of how jumbo loan rates compare to conventional mortgage interest rates, they’re typically just a bit higher. For example, you might find a 30-year jumbo loan with a 3.2% rate while a 30-year conventional loan might carry a rate of 2.99% or 3.1%.
It’s also important to note that there may be less consistency across lenders for jumbo loan rates versus conventional mortgages. That makes it even more important to shop around for the best jumbo loan option.
Finding a lender that offers highly competitive rates for a jumbo mortgage, like Ally Bank, hinges on two things:
- Improving your credit score and financials: A great credit score, low debt levels, and solid cash reserves can all work in your favor for getting a lower interest rate with a jumbo mortgage.
- Comparison shopping for the right lender: This matters because some may have better deals than others.
Pro tip: Consider whether a fixed rate or variable rate loan makes more sense. A fixed rate offers predictability — since your rate won’t change, neither will your payments. But a loan with an adjustable or variable rate could save you money if rates remain low, rather than adjusting upward — but this option may only be appropriate if you don’t plan to stay in the home long-term. We offer competitive rates on both fixed rate and adjustable rate jumbo loans.
If you’re making a home purchase and need to borrow significant amount, take time to understand the jumbo loan requirements before you start a mortgage application. Knowing what qualifications are needed can help ensure that you receive that oh-so-important approval.
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