The majority of properties qualify for conventional conforming loans. In most counties, or as determined by the Federal Housing Finance Agency (FHFA), the maximum amount for a conforming loan is $540,000.
Homes that exceed that value can only qualify for what is known as a jumbo loan, which is shorthand for a non-conforming conventional mortgage. Jumbo loans are generally considered riskier for lenders since the lender isn’t protected from losses if a borrower defaults. As such, jumbo loans are typically available with a fixed interest rate or an adjustable-rate and various terms that will be explained below.
What do you need to qualify for jumbo loans?
Because jumbo loans are larger and present a greater risk for lenders, the qualifications for one are generally stricter. Lenders will require extensive documentation of your financial status as proof that you are financially capable of taking out a jumbo loan.
Here are some of the following things they consider before granting such a loan:
- Your credit score. Lenders may require your FICO score to be higher than 700, even as high as 720, in order to qualify.
- Your DTI. Lenders may also consider your debt-to-income (DTI) ratio to make sure you don’t become over-leveraged (ie. having taken on too much debt). If you have large cash reserves, they may become more inclined to lend. Most lenders, however, have a hard limit of 45 percent DTI.
- Your cash reserves. If you plan to use your cash reserves as show money, lenders usually require proof that you have enough to cover one year of mortgage payments.
- Appraisals. They may require an appraisal of the home from a third party to confirm its value.
What are some big differences between jumbo loans and conforming loans?
Aside from the size of the loan and the property, there are usually a few key differences in how a lender treats a jumbo loan versus a conforming loan. Here are just some of them:
- Larger down payment. While it is possible to get a low down payment on a conforming loan, jumbo loans are more likely to require a down payment of at least 20 percent. It is uncommon, but some lenders do go as low as 10 percent.
- Higher Interest Rates. After gauging your financial situation, a lender may propose higher mortgage rates on a jumbo loan than a conforming loan. However, it is not impossible to find a lender that can offer competitive rates depending on market conditions.
- High closing costs and fees. A larger amount of money means more steps and complications for everyone involved, so it is expected to have higher closing costs and fees.
In any large financial endeavor, especially ones involving real estate, there are bound to be multiple complications and steps. Financing a larger home with a jumbo loan is no exception. The world of finance can be tricky, but with just a little bit of elbow grease, there’s no doubt that you can find a lender and loan that works for you without being too much of a burden.
For more information on jumbo loans and financing your next home, our team at Lend LA happily extends a helping hand. We’re the premier mortgage broker in Los Angeles, CA, with great reviews and a history of great relationships with our clients!