A Homebuyer’s Guide to Jumbo Loans

If you’re on the market for a new home, you’ve probably started looking into different types of loans. The typical loan is a conforming loan, but that has a limit in most areas in the country of $484,350 (some areas with a higher cost of living have a higher limit), so if you’re looking into a more expensive home with a larger mortgage, you’ll need a different type of loan called a jumbo loan. Learn more about jumbo loans and decide whether or not it’s the right type of loan for you.

What is a Jumbo Loan?

Most home loans fall into the category of conventional conforming loans. This means that they are under the limit of $484,350 and are protected by the federal government through Fannie Mae and Freddie Mac. Since jumbo loans go over that limit, they aren’t insured or protected, meaning that the lenders have to take on that risk themselves. Since lenders are taking a higher risk on jumbo loans, there are stricter requirements for who qualifies for one.

Qualifying for A Jumbo Loan

Jumbo loans have a lot more requirements than other types of mortgages to compensate for the higher risk. The qualifications include:

• Property type – You can buy many different types of properties with a jumbo loan, as there are no government restrictions on how you can use the loan. This means you can use a jumbo loan to pay for your primary residence, a second home (often a vacation home) or investment properties.
• Documentation – Many jumbo loan lenders require more extensive documentation to prove that you have good financial health and can take on the financial burden of a jumbo loan. Prepare to be asked to hand over your complete tax returns, W-2’s and 1099’s, plus any bank statements and information on investment accounts.
• Credit score – Your credit score is a large factor in determining the types of loans you can qualify for, since it shows how reliable you are as a borrower. Jumbo loans often require a credit score of at least 700 for a single-family unit and up to a minimum of 760 for an investment property.
• Debt-to-income ratio – This is the ratio of the amount of money you earn versus the amount of debt you have. A low DTI ratio is important to get a jumbo loan because it shows you have enough cash flow to support the larger loan. The industry standard for home loans is a DTI of 50% or less, but jumbo loans can require a ratio of as low as 36%.

Jumbo Vs. Conforming – What to Expect

There are certain factors associated with a jumbo loan that you should keep in mind when deciding if you should get a jumbo loan versus a conventional conforming loan.

• Cash reserves – Because jumbo loans are so risky, lenders often ask that you provide bank statements to prove you have enough cash in the bank to keep up with your payments. Many lenders want to see that you have at least 18 months’ worth of expenses in reserve so you’re less likely to default on your loan. This reserve can also be in the form of other accounts such as businesses, investments, and retirement accounts.
• Higher closing costs – Normal closing costs are between 3-6% of the total home value, but jumbo loans can have a much higher closing cost. This is because the overall home value is greater and there are extra qualifying steps, which means more time and work put into closing a deal on a house.
• Down payment – Home loans have a range of down payment requirements, with some loans not requiring any percentage down. Jumbo loans are a lot stricter and typically need at least 20% down. Often, there is a larger down payment requirement on investment properties as well.

Jumbo loans are large home mortgages that exceed the limits set by the federal government. A jumbo loan may be right for you if you have strong finances, want a higher-priced home, and are ready to take on a long-term financial commitment. To learn more about jumbo loans and which loan is the best for you, contact a Galaxy Lending Group loan officer today!