What You Need to Qualify for a Jumbo Loan
By Doug Goelz, Mortgage Services
In the Bay Area, most loans over $636,150 are considered jumbo loans. While Fannie Mae and Freddie Mac generally dictate guidelines for conforming loans (loans of $636,150 or LESS), each jumbo loan lender can determine its own specific, but often different, guidelines for its jumbo loans.
In general, lenders consider 3 things when approving a loan:
- Income: There must be sufficient income to support the monthly payments; as the loan amount increases, the income required to qualify for the loan increases.
- Credit: Key information includes credit scores, required monthly payments as a percentage of income (the debt-to-income ratio), and the number of credit accounts open and used.
- Reserves: Lenders often want to see that borrowers have liquid assets available to make payments if there is a disruption in income or an increase in expenses.
With jumbo loans, lenders may consider other factors ignored for conforming loans such as future earnings potential and funds deposited with the lender.
In my experience, Bay Area buyers seeking jumbo mortgages typically have the necessary income and excellent credit, but often are pressed to show the reserves required to qualify for a mortgage over $1,000,000.
Below are some typical requirements for jumbo loans:
Loans from $636,151 to $1,000,000
Loans up to $1,000,000 typically have debt-to-income requirements similar to those for conforming loans. Borrowers don’t have to have any reserves and can put as little as 20% down on the purchase of a property. However, for loans up to a $1,000,000, borrowers generally have to have middle credit scores of about 680 or better, considerably higher than is required for conforming loans.
VA Loans up to $1,000,000
Available only to qualified veterans, VA loans generally have low reserve requirements, lenient credit score minimums (middle scores in the low 600s are acceptable), typical debt-to-income requirements, and very low (less than 5%) down payment requirements. The toughest things about getting a VA loan might be the years of military service required before a borrower is eligible, and getting an offer accepted with VA financing. In our vigorous Bay Area real estate market, some sellers (mistakenly) think VA financing is going to require them to pay a lot of closing costs or to do major repairs on the property before the deal can close. Hence, sellers sometimes shy away from offers that include VA financing. In my experience, with properties in reasonable condition, VA loans don’t create any more of a burden for the sellers than any other financing.
Loans from $1,000,000 to about $2,500,000
Above $1,000,000, lenders want borrowers to have reserves (often at least 6 months of principal, interest, taxes and insurance on all properties owned), and they generally want the borrowers to put at least 25% down. Also, lenders for loans this size are not tolerant of recent bad credit. For example, one late mortgage payment in the past 12 months can be enough to kill a refinance deal in this loan range. Some lenders also want borrowers to have more income as a percentage of their monthly payments compared to the income required for lower loan amounts.
Loans from about $2,500,000 to about $4,000,000
Fewer lenders will make loans above $2,500,000. Those that do generally want to see more reserves (typically, hundreds of thousands of dollars) than with lower loan amounts, and they want excellent credit (middle credit scores of at least 740). Borrowers usually have to put at least 25% down, and many lenders for loans above $2,500,000 require 30% down. In this range of loans, some lenders have stricter guidelines for loans above $3,500,000 rather than $4,000,000.
Loans over about $4,000,000
For these very large loans, there are many fewer lenders, and they typically want at least 35% down and substantial reserves (often over $1,000,000).
The guidelines above are typical, but not absolute, because lenders have a lot of leeway to make their own guidelines for approving jumbo loans. To see how flexible a lender can be with a jumbo loan, try applying for a $4,000,000 loan a week after depositing $5,000,000 into the bank! If you are looking for a jumbo loan, but your financial profile does not fit typical guidelines, there are many small lenders who may consider a jumbo loan for exceptional borrowers. As with all credit, though, the more risk the lender perceives, the higher the interest rate.
Questions? Feel free to get in touch with me at 415-730-4665 or firstname.lastname@example.org