If you want to buy a luxury home or one that’s located in an expensive market, a jumbo loan could be a viable option. You’ll apply for a jumbo loan in the same way that you would any other mortgage product. Still, the eligibility criteria are generally more stringent than you’ll find with conventional and government-backed loans.
Here are the things that you need to know about jumbo loans, why they’re harder to qualify for, the minimum credit score requirement for a jumbo loan and where to secure financing.
What Qualifies as a Jumbo Loan?
A jumbo loan is a mortgage that exceeds the conforming home limit set forth by the Federal Housing Financial Agency (FHFA). In most counties, it’s $647,200, but you’ll find that it goes up to $970,800 in high-cost areas.
Are Jumbo Loans Harder to Qualify For?
Conforming loans adhere to Fannie Mae and Freddie Mac guidelines – both government-backed mortgage entities that purchase and guarantee mortgages issued by lenders and credit unions to provide stability to the mortgage market.
Jumbo loans are classified as non-conforming since they exceed this limit, making them riskier for lenders. Consequently, the qualification criteria are more stringent. Also, be mindful that lenders are free to set the guidelines however they see fit.
What is the Minimum Credit Score Required for a Jumbo Loan?
Most lenders require a minimum credit score of 680 to qualify for a jumbo loan. However, you may find that a 700 or higher is the norm in your market, which is far higher than you’d need if applying for a conventional or government-backed mortgage.
Why Do Lenders Require a Higher Credit Score for Jumbo Loans?
It all boils down to risk. The higher your credit score, the lower the likelihood of default. Since the lender agrees to give you a significant sum of money to buy a home, they need reassurance that you are a good credit risk. While there are no guarantees that you’ll repay what’s borrowed, the likelihood of walking away from the loan is not as high.
Other Things to Consider to Qualify for a Jumbo Loan
Beyond a 680 (or higher) credit score, familiarize yourself with these guidelines before applying for a jumbo loan.
Cash Reserves Requirement
Most lenders will want to see six to 18 months of mortgage payments. This amount should be readily available to you once you make the down payment and closing costs are paid.
Larger Down Payment
The minimum down payment varies by lender. However, anywhere between 10 percent and 30 percent of the purchase price is common.
Higher Interest Rate and Closing Costs
Expect a higher interest rate and closing costs when you take out a jumbo loan. The elevated borrowing cost results from the risky nature of these loans, and the lender charges steeper fees to cover the effort that goes into manual underwriting.
Lower Debt-to-income Ratio
Your debt-to-income (DTI) ratio, including the new mortgage payment, shouldn’t exceed 43 percent. However, a higher credit score may give you more leeway with the lender.
Proof of Consistent Income
The lender will also evaluate your income and employment history to ensure you can afford to make loan payments while managing your other expenses. For example, if you’ve only been employed for a short period, recently changed careers or have fluctuating income, proving that your earnings are consistent could be challenging. Or you could be denied a jumbo loan altogether.
Manual underwriting is required since the standards vary across the board. This makes taking out a jumbo loan more challenging and costly.
Where Can You Get a Jumbo Loan?
Buying a new home is one of the biggest investments you’ll make, so you want a lender that is reputable and puts your best interests first. Start by checking out what Angel Oak Mortgage Solutions, a full-service lender, has to offer.
You can choose from one of the following Jumbo Home Loan products:
- Gold Prime Jumbo Loan: loans of up to $3.5 million are available with a down payment of just 10 percent and a DTI not exceeding 50 percent
- Prime Jumbo Loan: the loan amount caps at $3 million
- Non-QM Platinum Jumbo Loan: the loan amount is also capped at $3 million, and a single-year tax return program is also available
- If none of these work for you, there is an assortment of other home loan solutions available. Submit an online request to learn more about mortgage products from Angel Oak Mortgage Solutions and see if there’s an alternative that is a better fit for you.