Awesome news! You are ready to buy a turn-key, jaw-dropping, absolutely gorgeous new home. Unfortunately, it seems all that beauty comes with a considerable price tag, one that has priced you right out of a conventional mortgage.
Maybe you have expensive taste or maybe your dream neighborhood is seeing an all-time spike in real estate value – either way, you’ve found yourself in a bit of a pinch. It looks like you’re going to need a jumbo loan, but don’t go blowing up social media with “sold” signs yet – not just anyone can qualify.
Before we jump in to the required criteria, let’s take a moment to explore if a jumbo loan is really the mortgage product you need. These loans are exactly as they sound – really large loans to finance (typically) really large or exceedingly expensive properties that a conforming loan will not cover. According to the FHFA, the conforming loan limits for 2021 are up to $548,250 for single-unit properties in the majority of counties across the country. Known high dollar areas such as California and Washington D.C. have been set at $822,375, both these limits up considerably from the previous year. In order to verify if your next purchase will hit the magic number requiring this type of specialized loan, browse the jumbo loan thresholds for your specific area.
Though the definition of a jumbo loan is quite straightforward, the stipulations around who can and cannot find approval are slightly more complex. In order to reach that final sign-off, there are a few hoops to jump through that look a lot more like hurdles for unprepared borrowers. Avoid getting tripped up in the final stretch by following these few simple recommendations:
Make sure your credit score is in tip-top shape prior to applying for a jumbo loan. Scores of at least 700, and for some lenders 720, are fairly non-negotiable, so do whatever you can to boost your credit before requesting an application. Next, you will want to evaluate your current debt-to-income ratio. Most banks are quite strict with their DTI cutoff lines and will not let borrowers pass with a ratio above 43%. As jumbo loans cover a considerable chunk of change, these banks may also request financial statements attesting to the cash reserves remaining when the ink dries. Some institutions might even want to confirm that you can cover payments for 3 months to 2 years in the event of job loss.
Unlike a conforming loan backed by the likes of Freddie MAC, a jumbo loan leaves the risk squarely on the shoulders of the lender should a borrower fail to live up to their commitments and stop making payments. Because of this, expect to provide ample documentation of your financial portfolio and income. The requirements for a jumbo loan will likely be more extensive than that of a conventional one. Bank statements and proof of income from the previous two years may be requested, so don’t be surprised when you’re asked to back up all your big talk in black and white.
Borrowing a larger amount of money obviously means also supplying a larger down payment. A full 20% is pretty standard on a jumbo loan, and while you can find lenders willing to knock it to 10%, PMI will be necessary until that full 20% equity has been built, adding to your overall monthly payment. Again, as the amount borrowed on these loans is higher than average, the closing costs associated tend to be, as well. For both these reasons, be sure you have plenty of cash on hand to cover these fourth-quarter costs. You might also want to brace yourself for a higher-than-average interest rate as these mortgages do hold greater risk for the mortgagee. Some banks make up for this by hiking their rates on jumbo loans, but others are more competitive. Just as with any home purchase, make sure to do your research when choosing a lender.
Tracking down all that paperwork and verifying every detail takes time, and as such, the jumbo loan approval process might progress more slowly than you’d like. There are times when second appraisals may be required to confirm the stated value of the property, and your loan officer or underwriter might have follow-up questions for you at various stages along the way. Trust that everyone is working toward a common goal, though, and before you know it, your meticulously landscaped new yard and all your social media profiles will be littered with signs shouting, “sold!”