If you’re buying a home and considering a jumbo loan, it pays to learn as much as you can about the loans. What makes that challenging is that not all jumbo loans are the same. In fact, they can vary substantially, depending on the amount and the lender.
With jumbo loans, lenders set their own underwriting guidelines, says Rob Walworth, director of mortgage sales at BECU (formerly Boeing Employees Credit Union).
And that means those requirements from minimum credit score to what the institution wants to see in your credit history to how much of a cash reserve you’ll need can vary widely.
Taking out a jumbo loan also means signing on for a larger debt load. And that’s something no homebuyer takes lightly.
While it’s “a bigger burden to bear,” it also doesn’t have to make you nervous, says Katie Miller, vice president of mortgage lending with Navy Federal Credit Union.
“Think about your life, what you’re taking on, and the market conditions,” she says. “There are more unknowns and personally more risk when it’s a bigger number.”
If you’re considering a jumbo mortgage, here are nine things you need to know.
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Yes, they’re bigger
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There’s a reason that they are called jumbo mortgages.
“As the name would imply, it’s a larger loan size,” Walworth says.
The mortgage amount that qualifies as “jumbo” will vary from county to county, based on local home prices, says Tyler Case, mortgage loan officer for PNC Bank.
In many locations, a jumbo mortgage is anything written for $417,000 or more. In other areas, where house prices are traditionally higher, the mortgage has to be at least $625,500.
And in some counties the starting point for jumbo loans will be somewhere between those two numbers — set to correspond with the local home market, Case says.
What you might not know is that the $417,000 minimum threshold for jumbos can change.
The FHFA annually reviews the ceiling amount for conforming mortgages and announces the results each November as federally required. And if the maximum amount for conforming mortgages were to change, that also would reset the minimum for jumbo mortgages.
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No Fannie or Freddie
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In the life cycle of a typical mortgage, the loan is often sold to one of two congressionally created financial service corporations: Fannie Mae or Freddie Mac.
That’s why smaller mortgages are called “conforming mortgages,” because they meet the standards required by these two government-chartered entities from the very beginning.
But that’s not the case with jumbo mortgages. They’re too large to meet conforming mortgage guidelines. So, lending institutions may keep the loans on their own books or sell them to other investment entities.
A more expensive house usually means a larger down payment. But with a jumbo loan, the lender also might want a larger percentage of the home price as a down payment, according to several lenders.
So you may have to part with a bigger chunk of cash.
Even so, the industry is seeing an uptick in the availability of loans with down payments in the 5 percent to 10 percent range, says Lynn Fisher, vice president of research and economics for the Mortgage Bankers Association.
But those lower down payments often come at a price.
Lenders willing to take a smaller percentage as a down payment often will increase the interest rate accordingly, Navy Federal’s Miller says. There will be interest-rate bumps associated with the percentage you’re financing, she says.
“Usually, the more you can put down, the better interest rate you’re going to get,” she says.
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Lenders will look at your credit profile
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When you’re borrowing more and the lender is backing the loan, it may want a little more assurance that your credit is worthy, although each lender can have slightly different requirements.
For the most part, lenders will be looking for a credit score no lower than 680, and some will require at least 700, says Bill Banfield, vice president with Quicken Loans.
They typically cap the borrower’s debt-to-income ratio at 40 percent to 43 percent, he says.
Each lender may have specific things it wants to see. For example, some lenders may be looking for certain signs of strong credit on your credit report.
At PNC, jumbo borrowers need at least a 700 FICO score, plus at least three current or former credit cards or loans — called “trade lines” — in their credit history, PNC’s Case says. And if a borrower doesn’t have a mortgage, the bank wants to see a year’s worth of rental records to show a pattern of managing household money, he says.
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More paperwork often is required
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You can expect to provide more documents for a jumbo mortgage. “The documentation for a jumbo loan is slightly more laborious,” Banfield says.
For instance, a self-employed borrower may have to provide two years of tax returns instead of one, he says.
In this range, it’s more common to see borrowers with more sources of income or more complex sources of income, Walworth says. “So a more complex income analysis is more common.”
It used to be that interest rates for jumbo loans were higher than with smaller, conforming mortgages. But that’s not necessarily the case anymore.
“Pricing for jumbo loans and conforming loans is almost equal,” Miller says. “Jumbos have come down, and in some cases, they’re even better than conforming.”
Banfield agrees. With jumbo mortgages, interest rates “are similar or better” than they are for conforming loans, he says.
There are several possible explanations for this situation. First, there’s a pretty good market for jumbo mortgages with investors, the Mortgage Bankers Association’s Fisher says.
That demand “has drawn interest rates down to or below those of conforming mortgages,” she says.
Second, the market for jumbo loans is highly competitive. That’s helping to keep interest rates down, so interest rates for jumbos “are essentially the same, where they used to be higher,” Walworth says.
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Reserve six to 12 months of payments
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Take out a smaller, conforming mortgage, and the lender might want to see a few months of mortgage payments in reserve, Banfield says. With a larger jumbo loan, that reserve needs to be bigger, too.
“Jumbo loans are much larger, and (lenders) are trying to make sure the client is in a better situation (financially),” he says.
Many institutions want to see a reserve fund totaling six to 12 months of payments. That’s considered standard, Case says.
Again, the reason is the size of the note. “It’s a less risky loan when you show more reserves,” he says
For example, PNC wants all of its jumbo borrowers to have at least six months’ worth of mortgage payments set aside — including principal, interest, taxes and insurance — in addition to the down payment and closing costs, he says.
If it’s a second home, expect the lender to want even more in reserve, Case says.
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While all lenders’ requirements are different, the vast majority of jumbo loans don’t require PMI, or private mortgage insurance, Banfield says.
So when the lender writes a loan with less than a 20 percent down payment, that lender may adjust the rate to cover the cost of self-insuring the loan, he says.
Just as with any other loan, borrowers need to make certain that a jumbo mortgage is a good fit.
“You want to ask yourself the same questions you’d ask for any loan,” Walworth says. Keep in mind, this home will be “a more expensive proposition and more expensive to maintain,” he adds.
A few smart points to cover: Can you make the payments? Is there anything on the horizon that would change your ability to afford that monthly note?
Are home prices stable in the area where you’re buying, or are they on a roller coaster? What happened to home values in that area during the last housing downturn? And do you have a game plan if the value of your house were to drop?
Smart borrowers will always be sure they can pay the monthly amount, plus the upfront fees that a larger mortgage requires, says Barry Zigas, director of housing policy for the Consumer Federation of America.
Fisher says to make certain that the loan is “freely prepayable,” or have no prepayment penalty. That can be especially important if you want to refinance or sell before you’ve paid off your loan.
In addition, don’t skimp on insurance. Since jumbo loans are frequently used on more expensive coastal properties, make sure you’re sufficiently covered in case of a major disaster or total loss.