Do you need a “conforming” mortgage or a “jumbo” mortgage? It sounds like a strange question, but it’s a real one.
Here’s why. In the U.S., there are two government-sponsored enterprises known as Fannie Mae and Freddie Mac that guarantee mortgage loans made by lenders up to a certain amount.
That amount is $453,100 in most states but is $679,650 in some high-cost areas.
Mortgages that fall under this threshold are said to “conform” to these limits and are called “conforming” loans (or “agency” loans). Whereas, mortgages for larger amounts are known as “jumbo” loans and are not government-backed.
In this blog post, we’ll discuss the requirements for getting approved for a jumbo mortgage loan and how to qualify for one.
What Is a Jumbo Mortgage and How Does It Work?
As mentioned above, a jumbo mortgage is a loan that’s bigger than the conforming limits. Jumbo mortgage loans are sometimes the only option for buyers in the most expensive real estate markets where home prices frequently soar over a million dollars. (For example, the median price of homes in San Francisco is $1.61 million)
Even assuming a buyer puts down the recommended 20 percent down payment on a million-dollar home, they’d need to borrow $800,000 to finance 80 percent of their purchase — putting them well above the conforming limits and into jumbo mortgage territory.
Jumbo Loan Requirement #1: The Right Credit Score
As with any mortgage, your credit score plays a huge role in determining whether or not you can qualify for a mortgage. You need a good to excellent score to get such a big loan.
If you don’t know your score now, you can get an estimate through a service like Credit Sesame or Credit Karma. Or, check your credit card’s monthly statement – many credit cards now provide your FICO score as a cardholder perk.
Technically, the minimum allowable credit score for jumbo loans is 680. But many lenders will look for a score of at least 720.
If your score is 720 or below, you may need to work on improving it before applying for a jumbo loan. Borrowers with a 720 or higher score will usually have a better chance of getting approved for a jumbo loan.
Jumbo Loan Requirement #2: A Big Enough Down Payment
With some loans, putting down 10 percent is perfectly acceptable. But you don’t get that kind of flexibility with a jumbo loan. Instead, you should plan to have 20 percent of the home’s purchase price in cash to put down when you buy a home with a jumbo mortgage in order to qualify.
Of course, that’s a lot of cash when you’re talking about a home that may be listed for well over half a million dollars. One solution could be to use a program like Unison HomeBuyer, in which a company invests alongside you in the home and shares a portion of the future change in the home’s value. That could make it much easier to put down the full 20 percent you would need to get approved for a jumbo loan.
Jumbo Loan Requirement #3: Proof of Income Plus Cash Savings
Coming up with a down payment is not the end of the road. You also need to show proof of earning enough income to support the monthly payments on a jumbo loan. If your lender cannot see that your income will ensure those payments will be met each month, they might not approve you.
You may also need to prove you have cash in the bank. Jumbo mortgage lenders often require that you show proof of cash reserves in addition to ongoing income. They want to ensure you can afford the payments even through some type of financial hardship like an unexpected job loss.
Jumbo Loan Requirement #4: A Manageable Level of Debt
Even if you have a strong income and large amounts of cash available, a lender could still deny your application for a jumbo loan if you have too much debt. That’s because an unsustainable debt load might prevent you from being able to pay your mortgage payments.
But how do they calculate your total debt? Lenders look at something called a debt-to-income ratio (DTI) to determine whether your debt is manageable. In other words, they look at how much money you make each month compared to how much is going toward debt repayments on credit card accounts, student loans, car loans, etc.).
Conventional mortgages allow for a DTI ratio of up to 45 percent, but jumbo loans are usually more strict, only allowing for a DTI of 38 percent. If your DTI is higher than that 38 percent, you should work to repay your existing debts (or at least reduce the balances) before trying to apply for a jumbo loan to buy the home you want.
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