The Federal Housing Finance Agency establishes loan-servicing limits, and a borrower must obtain a jumbo loan when their mortgage exceeds these limits. The requirements for a jumbo loan are stringent because it is a nonconforming financial product. The bank assumes more risk because the loan cannot be sold to Fannie Mae or Freddie Mac, government-sponsored entities.
Lenders are particular about jumbo loans and who qualifies for this type of mortgage. Borrowers must understand this and confirm they are in a financial position to qualify for the loan. To ensure they are, the borrower must understand the factors lenders consider and learn about the qualification process.
Jumbo Mortgage Requirements
Any mortgage exceeding $806,500 is considered a jumbo loan unless the home is in Alaska, Hawaii, or a federally designated high-cost market. Houses in these areas typically cost more than the national average, so lenders use a higher base price when determining what they qualify as a jumbo loan. Borrowers must meet specific requirements before obtaining a jumbo loan because of the higher risk associated with these financial products.
High Credit Score
Individuals seeking a jumbo loan need a credit score of 700 or higher. Lenders want to ensure the borrower can repay the funds, and a high credit score shows they are financially responsible. Some borrowers may require a higher score, but very few will accept a score lower than 700 for a jumbo loan.
Cash Reserves
The borrower must show they have liquid money to obtain a jumbo mortgage. Lenders determine what qualifies as liquid money, so borrowers may need to speak with several mortgage companies before choosing one to work with. The lender views the cash reserves as a safeguard against a loan default. Some lenders require borrowers to have 12 months in reserve, but again, this varies by company.
Debt-to-Income Ratio
Another thing lenders look at when determining whether a borrower qualifies for a jumbo loan is their debt-to-income ratio. Most lenders require a DTI ratio below 43 percent before approving a borrower for this type of loan. However, lenders prefer to see a lower figure.
Qualifying for a Jumbo Loan
If a person meets the requirements for a jumbo loan, they must show proof of income, including bank statements, tax returns, and pay stubs. Business owners will also be asked to share their profit and loss statements. The property must be appraised to determine the loan-to-value ratio and ensure the home is fairly priced.
Owners may need a larger down payment to qualify for a jumbo loan. A healthy down payment indicates good financial health, so lenders are more willing to work with the individual. Furthermore, the borrower must be able to cover closing costs or roll them into the loan without exceeding the amount they have been approved for.
Individuals looking to purchase a high-value property must ensure they can afford to pay for this residence. They may need to obtain a jumbo loan to do so, and it is essential to know the requirements for this type of loan, as they are more stringent than the requirements for a conforming loan. The borrower may need to optimize their financial profile before moving forward with the purchase, so a person should focus on their financial health before looking for a new residence. When their dream home is found, they can qualify for a jumbo loan and call this house their own.
