Depending on your financial circumstances and the property you want to purchase, a jumbo loan may be a good choice for you. Because jumbo loans exceed Fannie Mae and Freddie Mac’s conforming loan limits, they are typically held “on the books” by banks as profitable investments. Since they do not have to meet external underwriting guidelines, banks and private lenders that offer jumbo loans have more discretion and flexibility. Lenders, however, are looking for secure investments, so qualification requirements can be strict.
Qualifying For a Jumbo Loan
Qualifying for a jumbo loan will require a larger down payment and a higher credit score than FHA and most conventional or conforming loans. Here is what you will need.
- Have a minimum 20% down payment.
- Some lenders will require more than 20% down payment, particularly for non-owner occupant properties such as a second home or an investment property. You may be able to qualify for an 80-10-10 jumbo loan, where your cash down payment is only 10% of the purchase price. The additional 10% is covered by a higher rate second mortgage.
- Your debt to income ratio must be 38% or less.
- Loan payments, taxes, and insurance cannot exceed 38% of your gross income. Lenders will also look at other debts and your income history over the past two years to get a clear picture of your available cash flow for servicing the debt.
- Be prepared to document all income and assets.
- If you make all or even just a portion of your income from a cash business, you will not be able to simply state your income for the purposes of qualifying for a jumbo loan. All sources of income will need to be documented and verified independently to be included. Any assets that are being used as additional collateral or security for the loan will also have to be documented.
- You must have a credit rating of 720 or higher.
- Your FICO credit rating will have to meet this minimum level, and higher is definitely better. Certain exceptions may be possible if you have additional assets such as cash deposits and investments with the bank providing the loan.
When a Jumbo Loan Is Right For You
A jumbo loan is not for everyone, but in many situations, it is an excellent choice. Here are some of the more common situations where a jumbo loan might be for you.
Buying a Luxury Home
Even in areas that are not included in the FHFA’s list of high cost markets, a mortgage to purchase a luxury home can easily exceed conforming loan limits. Jumbo loans fill the gap in the million dollar plus housing market. In the U.S., estimates are that over 1 million home owners have homes valued at over a million dollars.
Maintaining Your Maximum Home Loan Interest Deduction
The IRS allows home owners to deduct the interest payments they make on their mortgage. This deduction is allowed on jumbo loans up to $1 million and also applies to home equity lines, refinancing, and second mortgages. Many high earning individuals maintain their mortgage at near the maximum level to take advantage of this deduction and to free up equity for other investments.
Taking Advantage of Low Interest Rates
Although some jumbo loans qualify as high cost financing, for some borrowers, the low rates are attractive. With banks paying historically low rates on deposits, they are able to make a tidy profit by lending money at even modest interest rates. Increased competition among banks for high net worth, low risk borrowers have brought the rates down even further.