Five Tips for Acquiring High Price Properties with a Jumbo Mortgage
A jumbo mortgage is any home loan that exceeds the conforming limit, the mortgage cap set by the Federal Housing Finance Agency (FHFA). That limit affects Fannie Mae and Freddie Mac, the federally backed home mortgage companies created by Congress to provide liquidity to the nation’s housing market.
For 2022, the conforming loan limit for a single-family home in most places is $647,200. In a few very expensive real estate markets (and several areas specially designated for higher conforming limits like Alaska and Hawaii), the limit is up to 150% higher, or $970,800 for 2022.
That means buying a house for $700,000 in most of the country will require a non-conforming, jumbo mortgage. Interest rates may be at historic lows, but real estate markets are also at all-time highs — so homes in the high six and low seven figures are more common than ever before.
Because non-conforming loans are not guaranteed by the government (with the notable exception of a VA jumbo loan) and because the actual dollar amounts at stake are much higher, lenders take on more risk to offer them. Consequently, the underwriting is more involved and so is the cost and complexity of the administration of the loan and the closing process.
Many borrowers want to know what they can do to improve their chances of securing a jumbo loan. Here are five tips to remove some uncertainty from the application process:
1. Improve Your Credit Score
To account for the enhanced risk of a large non-conforming mortgage, most lenders of jumbo loans require higher credit scores than for conforming loans. A minimum score of 700 is typical to borrow $650,000 to $1,000,000. For loans above a million dollars, credit scores in the mid to high 700s may be needed, though some lenders have less stringent requirements than others. Borrowers should routinely check their credit rating with all three credit reporting agencies (Experian, Equifax and TransUnion) and keep an eye out for errors or negative issues in need of resolution, such as late payments.
2. Provide as Much Documentation as Possible
Whether conforming or not, every mortgage requires significant submission of documents. But for jumbo loans, more may be required, and the better able a borrower is to prove their creditworthiness and the value of the property, the faster the underwriting process will go. Documents that should be collected include:
- Complete Tax Returns
- W-2s and 1099s
- Bank Statements
- Investment Account Statements
- Multiple Home Appraisals
3. Check Your Debt-to-Income (DTI) Ratio
DTI is a major indicator of credit worthiness. It is a measure of how much of a hopeful borrower’s monthly income is devoted purely to paying off their debts. High credit card balances, student loans, and mortgages on other properties won’t necessarily sink an individual’s chance of getting approved for a jumbo loan — so long as they have sufficient income to support that debt. A very flexible lender will accept a DTI as high as 50% for a jumbo loan, meaning half of the applicant’s income is devoted to servicing their debts.
4. Build Up Cash Reserves
In addition to proof of income that matches or exceeds debts, lenders will look at a borrower’s total asset picture. Their cash reserves should be sufficient to service the mortgage for at least 6 to 18 months. That way lenders know that should the borrower lose their job, they will be able to continue making mortgage payments while they look for a new source of income.
5. Make a Larger Down Payment
Non-conforming loans are not required by any government agency to have minimum down payment requirements. Every lender sets their own, but for jumbo loans that don’t have the protection of a government guarantee, larger down payments help limit the risk of default. Hence, some jumbo lenders will want a down payment of 20% or more. It should be noted, however, that the one government-backed jumbo loan, a VA mortgage, is available to eligible service members, veterans, and surviving spouses and sets no loan limits. Even very large VA loans up to $2,000,000 are available with just 10% down.
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