Borrowers seeking large home loans are finding an increasing number of lenders today offering jumbo mortgages— loans for more than the conforming limit set by Fannie Mae and Freddie Mac, typically starting at $417,000 for most parts of the country and reaching as high as $625,501 in some higher-priced real estate areas. They’re also finding low rates. On the other hand, the qualification requirements remain stringent because they are not insured by Fannie Mae and Freddie Mac, leaving the lender responsible if the borrower defaults. Here, five factors to keep in mind if you’re trying to qualify for a jumbo mortgage.
You’ll need to be able to prove you have the income and liquid reserves to cover the payments. Traditional borrowers will need recent pay stubs dating back 30 days and W2 tax forms stretching back two years to prove income. If you’re self-employed, prepared to show two years of tax returns and at least 60 days of bank statements. You’ll also need liquid assets to qualify: Come prepared with six months of reserves of the new mortgage payments.
2. Debt-to-Income Limits
Many jumbo loans are qualified mortgages, a system developed by the Consumer Financial Protection Bureau to standardize mortgage terms. If you apply for a qualified mortgage, your debt-to-income ratio cannot exceed 43 percent. If your debts push you over the limit, you still can apply for a non-qualified mortgage, but the lender will still need to verify you can comfortably repay the loan.
3. Credit Scores
Due to the higher dollar value of these loans, credit score requirements are higher for jumbo loan applicants. You’ll need at least a 680 credit score to qualify for most jumbo loans. However, all lenders set their own credit score requirements, and some lenders may require a higher score for approval.
Qualified mortgage rules have increased the need for documentation. Although borrowers may have been approved for a jumbo loan with limited paperwork in the past, that is no longer the case. When you apply, you’ll need to provide documentation to back up any claim you make, including proof of income from all sources; proof of liquid assets; documentation on other loans you hold; and proof of ownership of non-liquid assets such as other owned properties.
5. Down payment
Although applying for a jumbo loan might be more difficult, borrowers may have one thing to look forward to: lower down payments. In the past, a 20 percent to 30 percent down payment would be needed for a jumbo loan. Today, only 10 percent is needed with good credit. But keep in mind that putting a smaller payment down upfront can affect your mortgage terms. Be sure to read the mortgage documentation carefully.