How to Qualify for a Jumbo Mortgage: A Comprehensive Guide
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If you’re in the market for a luxury or high-priced property, a jumbo mortgage may be what you need to buy the home of your dreams. Before you go ahead and apply for one, it’s a good idea to familiarize yourself with what a jumbo loan is and its eligibility requirements. Here’s what you need to know about jumbo loans and what you may need to take one out.
Understanding Jumbo Mortgages
Put simply, a jumbo loan is a mortgage with a higher balance than the conforming loan limits set by the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac. In 2024, this conforming loan limit is $766,550 in most markets and goes even higher in Alaska, Hawaii, Guam, and the U.S. Virgin Islands.
Compared to other types of mortgages, such as conventional loans and government-backed loans, jumbo loans are riskier for lenders. In the event of default, they can’t be sold to Fannie Mae and Freddie Mac and there is significantly more money on the line. For this reason, jumbo mortgages have stricter requirements and can be a challenge to qualify for, especially if you don’t have the best credit and a substantial amount of cash saved up.
Assessing Financial Prerequisites
To get approved for a jumbo loan, you must prove excellent financial health and a track record of responsible fiscal management. While every lender has their own criteria for what this means, most lenders require excellent credit, a stable income, a low debt-to-income ratio, and significant cash reserves. Before you go through the application process, it’s important to sit down and evaluate your finances to determine if you can meet the lender’s stringent requirements.
Building Credit
Your credit score shows your creditworthiness and how likely you are to repay a jumbo loan. Most lenders look for a credit score of at least 700. Since other types of mortgages like FHA or VA loans are far more flexible with credit and you may qualify with a score in the high 500s or low 600s, the credit criteria of jumbo loans can be a barrier for many borrowers.
The good news is there are ways you can improve your credit and strengthen your application. First, visit AnnualCreditReport.com to pull your credit reports from the major credit bureaus and review them for errors or inaccuracies. If you find any, like a bill you know you paid but is showing as unpaid, dispute it with the credit bureaus. Fixing the error may improve your score. Then, do your best to pay all your bills on time, repay debt, and only apply for new credit when you absolutely need it. Keep in mind that a strong credit profile also opens the doors to favorable interest rates and loan terms.
Demonstrating Financial Stability
At the end of the day, lenders want reassurance that you’ll be able to pay back a large mortgage. Showing documentation of a stable income can help.
Some jumbo loan lenders may also ask you to show that you have anywhere from six months to one year of cash reserves to protect you during times of financial hardship. If they know you’ll be able to pull from your savings and make your mortgage payments even if you lose your job, they’ll be more likely to approve your application.
While financial stability is crucial with all types of mortgages, it’s particularly important with jumbo loans.
Managing Debt-to-Income Ratio
Your debt-to-income (DTI) ratio is your total monthly debt payments divided by your gross monthly income. Jumbo loan lenders typically prefer a DTI of no more than 43%, as this figure demonstrates that you may be able to handle another debt payment.
If you find that your debt-to-income ratio is higher than you’d like it to be, you can work to lower it. To do so, increase the amount of money you put towards your debts each month to pay them off more quickly. Or you may be able to boost your income through a promotion, side hustle, or part-time job so that you have the funds to reduce your debt faster. In addition, you should avoid taking on additional debt, which may mean you’ll need to delay any new big purchases that would require credit.
Building A Down Payment
Unlike some conforming loans, which may come with lenient down payment requirements as low as 3% to 5% of the home’s purchase price, jumbo loans require a much higher down payment. Typically, you’ll need at least 20% to get approved. Some lenders look for as much as 30% down.
A minimum down payment for a jumbo loan will likely be anywhere between $200,000 and $400,000, depending on the price of the home. Note that not only does a larger down payment lower your loan amount, it can also unlock more competitive loan terms, which may make it even more affordable and improve the chances of approval.
Property Appraisal and Underwriting
It’s common for lenders to request two home appraisals for jumbo loans to confirm the value of the home, especially if the loan exceeds $1.5 million. During an appraisal, a licensed professional will assess the condition of the property and compare it to similar properties to figure out the appraised value. They’ll provide the lender with a formal appraisal report that lowers the risk of lending more money than the home is worth. It can also protect you from overpaying for a home.
Once you provide all the required credit and financial paperwork, most jumbo loans will go through a time-consuming and intensive manual underwriting process unlike other types of mortgages, which usually qualify for automated underwriting by a computer system. Manual underwriting involves a human underwriter who carefully reviews your loan application and all the documentation that you provide. Then, the underwriter makes a decision based on your credit history and ability to pay back the jumbo loan.
Disclaimer: Article content is intended for information only. It may not reflect the publisher’s or employees’ views. Consult a mortgage professional before making financial decisions. Publishers or platforms may be compensated for access to third-party websites.
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