Jumbo Loans

In this guide on Jumbo Loans, we will cover traditional and non-QM jumbo loans available at Non-QM Mortgage Lenders Any mortgage loan that exceeds the maximum conforming loan limit is considered non-conforming. Fannie Mae and Freddie Mac will not purchase mortgages that exceed their conforming loan limit. Days of needing perfect credit and high credit scores are long gone. Non-QM Mortgage Lenders has non-QM jumbo loans for home buyers with credit scores down to 550 FICO where they can qualify. In the following paragraphs, we will cover and discuss what Jumbo loans are and how they work.

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What Makes a Home Loan a Jumbo Loan?

If the loan size exceeds the maximum conforming loan limit, it goes into jumbo loan territory. Jumbo loans are portfolio loans. There are no set uniform agency mortgage guidelines on jumbo mortgages. However, most mortgage lenders share common mortgage lending requirements on jumbo loans. In this guide, we will cover what jumbo mortgages are and go over traditional versus non-QM jumbo mortgages for borrowers of high-end homes.

What Is A Jumbo Loan?

Jumbo loans are home loans that exceed the maximum conforming loan limit set by the Federal Housing Finance Agency. When you decide to purchase a new home, there are many options available to you in terms of what type of loan you may require. A jumbo loan is a non-conforming loan. This means that this type of loan does not meet the guidelines set to fit in a typical loan limit. Limits are set by the Federal Housing Finance Agency, FHFA. If it does not fit into these guidelines, Fannie Mae or Freddie Mac will not purchase these loans.

What Is The Role of Fannie Mae and Freddie Mac

Who are Fannie Mae and Freddie Mac? These are created by the US Congress and are government-sponsored agencies that basically buy mortgage loans from lenders. Their purpose is to provide stability to the mortgage market. Because of this, they have guidelines to ensure loans conform to the rules they set. One of these conforming loan limits is a limit on how high your mortgage can be. If you would like to check how high the conforming loan limit is for your area, you can check it on the FHFA Map on the FHFA.gov website.

Buying a Home That Exceeds The Maximum Loan Limit Threshold?

What to do if the home you want to purchase falls outside of the limits? Most of the United States has a conforming loan limit of $647,200. Now, you might be thinking that 650,000 will not buy much in your area. This could be true! If you live in an area where this might buy you a shack, you know you will need to take out more than that.

High-Cost Areas

Conforming loan limits do vary by location, and it is with good reason. In certain areas, $300,000 will get you a beautiful home that meets all your needs. In another area, the same house would cost twice that amount. The conforming loan limit will vary from county to county. If you wish to purchase a home above the conforming loan limits, this is where jumbo loans come in.

Are Mortgage Rates Higher on Jumbo Loans?

Because jumbo loan lenders are taking a significant risk with the size of the loan being outside the conforming limits, they will look at your financial situation very thoroughly.

Why Are Mortgage Rates on Jumbo Loans Higher?

Interest rates for Jumbo Loans are higher than traditional conforming loans. A frequently asked question at Non-QM Mortgage Lenders is are interest rates higher for jumbo loans? The short answer is yes. This is because mortgage lenders view jumbo loans as higher-risk loans versus traditional home loans.

Jumbo loans are high risk as it’s outside the conforming limits, making it more precarious for the lender. However, the buyer needs to take several considerations- the difference could be very minor. The buyer needs to figure out what that amounts to. Need to see if it is worth having a higher interest jumbo loan over a 15 to a 30-year term. Another point is that jumbo loan rates could fluctuate depending on the market and investor demand. You will need to see what lenders are offering the best mortgage rates on jumbo loans.

What Do Lenders Take Into Consideration In Pricing Rates on Jumbo Loans?

Borrowers need to make sure they have maximized their credit scores and credit profile. Jumbo mortgage lenders take into consideration your credit score and the amount of money you can put down. This can all affect the interest rate you can get.

Credit Score Requirements on Jumbo Loans

We all know that when you purchase a home, the lender will check your credit score. Usually, a lender is looking for a credit score of around 680. Although you might still be able to get a jumbo loan with a credit score of 680, they would like to see your score at 700 or above. If you can secure a loan with a lower credit score, you should expect a higher interest rate.

Can You Get Jumbo Loans With Low Credit Scores?

Lenders set their own requirements for home mortgages, and they will set the required credit score. Because the jumbo loan requires a higher score, it is vital that you check your credit score and are aware of any issues before applying. You need to check to ensure that there are no late payments, missed payments, foreclosures, or inaccurate data on the reports.

Can You Get Jumbo Loans With Bad Credit?

If there are inaccuracies, you can dispute these through the credit bureau. This can take time, so you will want to start months prior to applying for a loan. If you have gone through bankruptcy or foreclosure, it will take at least seven years for this to come off of your credit report. If this is the case, you might still be able to get a jumbo loan; however, you need to have a great history since then with an explanation of why you went through either bankruptcy or foreclosure.

Additionally, A lender will want to see that you have consistent employment and income. Because the loan is for more, a lender will want to see at least two years of documents. They might also request more documentation and guarantee that your income will remain steady and unchanged after you get the loan.

Cash Reserve Requirements on Jumbo Mortgages

All lenders will look at your cash reserves; however, this is particularly important if you are looking for a jumbo loan. A general rule of thumb is to have a cash reserve able to cover 6-12 months of mortgage payments, along with the cash needed to cover down payments and closing costs. This may be out of reach for some individuals, and if you do not have such a large cash reserve, excellent credit and low DTI could help offset the amount of cash reserves needed.

Debt to Income Ratio Requirements on Jumbo Loans

Your Debt to Income Ratio (DTI) is what your income is compared to your outstanding debts. This is done by adding up all your monthly bills and all your monthly income. This information is checked against your credit report, so it is important to know and understand that you must include it all. If your DTI ratio is high, this might signal that you will be unable to pay your mortgage.

If you have a low DTI ratio, this might help you if you have a troubled credit score. For non-conforming loans, a debt-to-income ratio of 50% or less is considered standard. If you are applying with another person, perhaps a spouse, you can use both combined income and debts. You will need to determine if this helps or hurts your case.

Loan To Value Guidelines on Jumbo Mortgages

Loan to Value (LTV) is the amount of your loan compared to the loss of either the purchase price or appraised value of your home. The reason why this is important to lenders is that they need insurance so that if you default on the loan, they have the house as collateral. If the home is not worth the amount of money they loan you, they will not be able to make the money back. When determining your LTV, they look at the amount of money you are going to finance in regards to the appraised value or purchase price (the one that is less). This is then converted into a percentage to determine your LTV.

Home Appraisal Process on Jumbo Mortgages

When you apply for a jumbo loan, sometimes the lender will want two appraisals to ensure they are protected. This is especially true if the loan amount is over $1,500,000. The assessment will look at the area of the home, the home’s condition, and the other homes in the area. These all will affect the appraised value. Other than the second appraisal, the home appraisal process will be the same.

Down Payment Requirements on Jumbo Loans

The down payments for a jumbo loan will be higher because it is based on a percentage of the loan. Jumbo loans are for higher amounts, more than a conventional loan, outside the conforming limits. Jumbo loans generally require 20% of the loan down. This could vary but mostly depends on your credit score, high and steady income, and perhaps your cash reserve or assets.

Private Mortgage Insurance on Jumbo Mortgages

Private Mortgage Insurance (PMI) is required for a loan if you pay less than 20% down. This is insurance on the loan to ensure that the lender gets their money back if you default on it. Jumbo loan lenders decide whether you will need to purchase PMI.

FHA Jumbo Loans

HUD, the parent of FHA, has certain parts of the country classified as high-cost areas. High-cost areas are counties where home prices are above the median price. The maximum high-cost FHA loan limit for 2022 is $970,800 for single-family homes. HUD guidelines on FHA loans in high-cost areas are the same. However, each individual mortgage lender may have higher lending requirements and overlays in high-cost counties on FHA loans.

VA Jumbo Loans

Because jumbo loans fall outside of conforming limits, there are no federally backed mortgage programs for these loans, right? Wrong! There is one exception. The Veterans Association (VA) no longer has a maximum VA loan limit. However, any VA loan that is higher than the maximum conforming loan limit is considered a VA jumbo loan for the purpose of credit underwriting. VA does offer jumbo loans for loans that are over the county-specific conforming loan limit. These are for VA qualifying service members. The service requirements are the same as a conforming VA loan, but the credit and income requirements are more strict. Some considerations for a VA Jumbo Loan:

No minimum credit score requirements
Cash reserves might be required depending on the lender.
There is often no down payment needed for a VA Backed Jumbo Loan.
Interest rates will vary depending on market fluctuations and your credit.
The VA does not set interest rates as the lender sets them.
VA loans can only be used for primary residences and not for second homes or income properties.

Types of Properties You Can Purchase With a Jumbo Loan

What kind of property can you purchase with a jumbo loan? There are no restrictions on what type of property a person can buy with jumbo loans, other than the above-mentioned VA jumbo loan. A borrower can use a jumbo loan to purchase primary homes, luxury homes, vacation homes, multi-unit properties, and investment properties.

Closing Process on Jumbo Loans

The closing process on jumbo loans. You may be wondering if the closing process for a jumbo loan is different from a conforming loan. The answer is not always. It depends on how quickly you can supply the supporting documents for loan processing. Loan processing is actually the most lengthy part of the loan process. You will also need to ensure that you have previously checked your credit report for issues, and confirmed that there are no issues. Because most jumbo loans require two home appraisals, this could delay the process as well.

The Jumbo Loan Mortgage Process

Jumbo loans will normally be manually underwritten. A manual underwriter is an actual skilled professional. This means that an underwriter will go through all your history and documents for issues. This can also take some additional time vs automated underwriting. Automated underwriting is a computer that uses an algorithm to determine if you qualify. Although this sounds worrisome (a computer is deciding if you qualify!?) the lender will check the findings and make the final decision. In general, a manual underwriter can help a person with various financial details who might struggle to get approved through automated underwriting.

How Can I Get a Jumbo Loan?

Is a jumbo loan right for me? If you have reviewed all the information and are still unsure if you should apply for a jumbo loan, there are still other options for you. If you decide that you do not want to apply for a jumbo loan, you could try to put down enough money to drop the amount borrowed below the conforming loan limit. If you have large cash reserves, this could be an option for you. This option also allows you to potentially not have to buy personal mortgage insurance.

What Is a Piggyback Mortgage Loan?

You could also consider a “piggyback loan”. A piggyback loan is a second loan that can supplement your down payment and reduce the amount you need to take out on the first loan. What this basically means is that you are taking out two mortgages, and you can avoid PMI and higher interest rates.

How Does a Piggyback Mortgage Loan Work?

The most common loan structures for piggyback loans are 80/10/10 and 75/15/10. These are the percentages of how the funds are split up. As an example, you would typically take out about 80% of the home’s purchase price, then another secondary loan for the other 20%- 10% for the piggyback loan amount and 10% for the down payment amount.. However, this can be a difficult process, and imagine all the steps involved to apply for two mortgages as opposed to one. The lender will look at your debt-to-income ratio, and you will need to have a higher income to cover both loans. It is essential to consider that although you can avoid PMI, you will now be repaying two loans.

Shopping For a Jumbo Loan

In today’s market, you might find that home prices have skyrocketed, and more and more people are in need of a jumbo loan mortgage. This is not necessarily bad. If you take the time to look around at different lenders, get your credit report in shape, and save up cash reserves, it can be the answer for many individuals who are looking to buy a home above conforming limits.