An application for an FHA loan is not the same as a VA loan. One for a commercial property is not the same as a jumbo loan. Each specific loan type comes with their own unique set of program guidelines and highlights.
A jumbo loan is any loan that exceeds the conforming loan limit in the zip code the property is located in. The floor for a jumbo loan is $484,350, with a ceiling over $720,000 is some areas. If you are applying for a jumbo loan there are a few items that you should know and be ready for. The quicker you provide whatever is needed, the quicker you can get into your dream home. Here are four items you need to know if you are applying for a jumbo loan.
Increased down payment. It is important to understand that what you have heard regarding loan approval may not apply to a jumbo loan. Because of the size of the loan and the risk taken on by the lender they are going to scrutinize every aspect of the application. They do not adhere to FHA guidelines of a minimum 3.5% down payment. Jumbo loans typically offer 5% down minimum, if everything else is sterling with the application. Typically, you can expect the down payment to be in the 10-20% range. If you do put down only 5% you can expect above average PMI (private mortgage insurance) payments attached to your loan. There simply isn’t a jumbo down payment option with less than 5% down out there.
Higher credit scores. If you are applying for an FHA loan you can get away with credit scores around 600, or less. With a jumbo loan the credit score requirement is much higher. You will most likely need a score of 680 to be considered. There may be a lender that will go down to a 660 score, but with that they will also ask for 20% down payment. With any loan the higher the credit scores the more reduced down payment options you can find. Conversely, the lower your scores are the more down payment required. Not only do your scores need to be strong but there cannot be any mortgage lates or other significant derogatory items.
Above market rates. On average, you can expect anywhere from .25 to .50 higher interest rate for a jumbo loan. Like any other loan, there are variances based on down payment, credit score and overall credit profile, but that is the ballpark. With a higher rate also comes a higher payment. A quarter point shift in a large loan size is much more impactful to the monthly payment than a smaller loan. Lenders view jumbo loans as riskier and will add a premium to the interest rate. Higher rates may also impact your debt to income ratio. Most jumbo loans have a maximum DTI of 43%, meaning even a quarter point shift in the rate could throw your ratios for a loop.
Greater documentation. If you are applying for a jumbo loan you need to resign yourself to the fact that the lender is simply going to ask for more items. For starters, the lender may ask for two appraisals if the loan amount is more than $1 million. Next, they will ask for at least two months of bank statements and two paystubs. If there is anything even slightly out of the box with how you get paid, they will need you to break it down for them. This may require a letter from your employer or your accountant. Instead of fighting the items that you don’t agree with you are better served accepting it and getting whatever your lender asks for as soon as possible.
As much as applying for a jumbo loan is different the basic underwriting is the same. The three main pillars of approval: credit score, down payment and debt/income are still in place. There are just a few differences with a jumbo loan that you should be aware of, and ready for.