Are you in the market for a jumbo loan? First, let’s talk about what exactly constitutes a jumbo loan.
What is a jumbo loan?
A jumbo loan is a loan that exceeds the Fannie Mae loan limits.
For example, in Long Island, New York, the conforming loan limit in Nassau and Suffolk County for a single family home is $647,200. Does that mean if you need to borrow $648,000 you have a jumbo loan? No, and here’s why: Fannie Mae has established what are called “high balance” loan limits for certain high cost areas. On Long Island, that limit (for a single family home) is $970,800. So you could borrow up to $970,800 to buy a house on Long Island and your loan would not be considered a jumbo loan. Loans that fall within the Fannie Mae limits are often referred to as “conforming” loans.
What if you’re not buying in a high cost area? What if you’re buying a house on Cape Cod (Barnstable County, MA)? There, the Fannie Mae loan limit is just $647,200, and so is the high balance loan limit. If you need more than $647,200 to buy a house on Cape Cod, you need a jumbo loan.
Now that you know what the definition is of a jumbo loan, let’s examine the 5 things that are different when you get a jumbo loan.
- Income Requirements
- Asset Requirements
- Credit Requirements
- Appraisal Requirements
- Rates
INCOME REQUIREMENTS
When you need a jumbo loan, you need to provide two years of income documents (W2s and tax returns) plus 2 recent paystubs. If your income includes a bonus component, you need to document a 2 year history of receiving bonus. With a conforming loan, you might be able to show just 1 year of income documentation. In addition, with a jumbo loan, your maximum (“DTI”) is often lower than it would be if you needed a conforming loan. Many jumbo programs require no more than 43% of your income going to housing and other debt. Whereas with a conforming loan, you can often go up to 50% DTI.
ASSET REQUIREMENTS
With a conforming loan, you can get away with as little as 3% down (if you or your co-borrower are first time home buyers). With a jumbo loan, you usually have to put down at least 10% of the purchase price. With a conforming loan, you can often get a gift for the down payment and/or closing costs. With a jumbo loan, gifts are often not allowed. With a conforming loan, you may not need to show much in the way of “reserves” (liquid assets left after you close). With a jumbo loan, you often need to show anywhere from 6-12 months reserves (reserves are calculated based on the monthly payment on your new mortgage, taxes, and insurance).
CREDIT REQUIREMENTS
With a conforming loan, the minimum credit score is 620. With a jumbo loan, you usually need a score of 700 or higher.
APPRAISAL REQUIREMENTS
With a conforming loan, you might not even need a full appraisal. With a jumbo loan, you may need not just one full appraisal but two (depending on loan amount).
RATES
Rates on jumbo loans are often higher than rates on a conforming loan. How much higher? That depends on your DTI, where you’re buying, and your credit score. Sometimes you can break your jumbo loan up into two parts (a conforming or high balance first and a HELOC or second mortgage for the balance) to avoid paying jumbo rates. Your best bet is to contact a mortgage professional at Amerifund Home Mortgage to find out how you can save money on your mortgage.