Jumbo loans are so-called primarily due to the amount borrowed compared with the conforming loan limit for the area. In most parts of the country, like Charlotte, the maximum conforming loan limit is currently $806,500.
A Jumbo loan would be considered any amount above this. Each year, the Federal Housing Finance Agency, or FHFA, publishes the annual conforming loan limits for the entire country based upon previously released housing data, specifically the national average home values taken from the third quarter of the previous year.
As it relates to qualifying, jumbo loans are processed and approved in much the same manner as with any other loan type, yet the minimum credit scores may be higher with jumbo loan programs compared to conforming ones. The minimum credit score for many conforming loans is 620 while the minimum credit score for jumbo loans is higher. Borrowers generally need a 680 + credit score when financing 90% or 95%. With a jumbo loan, how do lenders use the credit score during the loan approval process?
Credit scores are compiled using an algorithm developed by the FICO Company. Credit scores can range from as low as 300 to as high as 850. These scores review recent credit history based on five separate categories, payment history, available credit, length of credit history, types of credit and inquiries.
Payment history is the most important of the five, accounting for 35% of the total score. Payment history looks for any payments made more than 30 days past the due date. If such a payment is made and is relatively recent, credit scores will fall. If payment is made more than 60 days past the due date, scores will fall even further.
Scores will also compare how much is owed on credit accounts with maximum credit limits. For borrowers who keep their credit balances around one-third of their credit lines scores will improve. As these balances approach, the credit limit scores will begin to falter. Scores will also be damaged if account balances exceed, even temporarily, the credit line. This category accounts for 30% of your total score.
How long you have had credit will also affect your score. The longer you’ve had a credit history, the better your score will be and makes up 15% of your total score. Types of credit, 10% of your score, relates to using different types of credit such as having a credit card and an automobile loan. The final 10% reviews how many times you’ve requested a new credit account. Several recent requests for new credit can cause scores to fall.
There are three main credit repositories, Equifax, Experian and TransUnion and each uses the very same algorithm. When lenders request credit when evaluating a loan application, they will also receive a credit score from each. Because different merchants can subscribe to one, two or all three repositories and at different times, credit scores are typically similar but rarely exactly the same.
For example, a borrower requests a jumbo loan and the jumbo lender orders credit. The returning scores might be 743, 749 and 754. The lender tosses out the lowest and the highest score and uses the middle for qualifying purposes. In this example, the qualifying score is 749, above the 680 jumbo minimum.
Jumbo lenders can also offer slightly lower interest rates on different loan programs based upon different factors. Someone with a 30% down payment might be offered a better rate compared to someone with a 5% down payment, for example. So too can jumbo lenders offer lower rates for those with better credit, what lenders sometimes refer to as “loan level pricing adjustment.”
Finally, it’s important to note that while consumers can request their own credit scores those won’t necessarily be the same as the ones jumbo mortgage lenders use. They may be similar, but they’re generally not the same due to the different scoring models used.
Home buyers can read more about all the Jumbo Loan Purchase requirements here. Also, be sure to read through the helpful FAQ’s here.
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