A jumbo loan is a form of home financing which exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA). Unlike conventional mortgages, it is not eligible to be purchased, guaranteed or secured by Fannie Mae or Freddie Mac. A Jumbo Loan was created to finance luxury properties and homes in highly competitive local real estate markets. They come with unique underwriting requirements and tax implications.
How Big is a Jumbo Mortgage?
It varies by state and even county. The FHFA sets the conforming loan limit size for different areas on an annual basis, though it changes infrequently. In fact, the 2017 maximum limit for one-unit properties of $424,100 (for most of the country) is the first across-the-board, baseline increase since 2006.
Currently, a mortgage which exceeds a total of $424,100 is considered a jumbo loan in the vast majority of the continental U.S.The conforming limit can be higher in areas with steep home prices. In the highest of these “high-cost zones,” a jumbo is a loan above $636,150. Loan limits are often even higher outside of the continental U.S.. In fact, the limits in Hawaii’s five counties range between $636,150 and $721,050.
Qualifying for a Jumbo Mortgage
If you have your sights set on a upscale residence that costs close to half a million or more – and you don’t have that much sitting in a bank account – you’re probably going to need a jumbo mortgage. And if you’re trying to land one, you’ll face much more rigorous credit requirements than homeowners applying for a conventional loan. That’s because jumbo loans carry more credit risk for the lender, due to their lack of a Fannie Mae or Freddie Mac guarantee, as mentioned above. And, of course, because more money is involved.
As with mortgages in general, minimum requirements for a jumbo have gotten increasingly stringent since 2008. To get approved, you’ll need:
a stellar credit score – 700 and above —
and a super-low debt-to-income (DTI) ratio – under 43%, at least, and preferably closer to 36%.
You’ll need to prove you have accessible cash on hand to cover your jumbo mortgage payments,
All borrowers need pay stubs dating back 30 days and W2 tax forms stretching back two years.
If you’re self-employed, the income requirements are greater: 2 years of tax returns and at least 60 days of current bank statements.
He or she also needs to prove they have the liquid assets to qualify and cash reserves equal to six months of the mortgage payments.
And all applicants have to show proper documentation on all other loans held and proof of ownership of nonliquid assets, like other real estate.
Jumbo Loan Rates
Today, the average annual percentage rate (APR) for a jumbo mortgage is often par with conventional mortgages — and in some cases, actually lower. Otherwise, banks may charge from 0.25% to 1.5% more interest on a jumbo loan.
Down Payment on Jumbo Loans
In recent years, figures have fallen as low as 10% to 15%. You could attribute all these low rates for interest and down payments to banks are generally very eager to find new customers for their jumbo loan packages. Jumbo mortgage borrowers are likely to be, or well on their way, the sort of high net worth individuals institutions love to sign up for long-term products. Such clients have an excellent credit history, plenty of assets and, often, the need for additional wealth management and investment services down the road. Plus, it’s more practical for a bank to administer a single $2 million mortgage than 10 $200,000 mortgages.
Who Should Get a Jumbo Loan?
The ideal candidate would be high-income earners who make between $250,000 and $500,000 a year. This segment is known as HENRY, an acronym for “high earners, not rich yet,”; it refers to people who generally make a lot of money but don’t have millions in extra cash or other assets accumulated – yet.
Along with having more well-established credit, high-income earners also tend to have more solidly established retirement accounts. They have often been contributing to such investment accounts for a longer period of time than lower-income earners. They have usually contributed more funds to such accounts, so that the account balances represent substantial sums.