The concept of a jumbo mortgage really first began back in 1970 as a result of actions taken by the Federal Government. Then, there were two Government Sponsored Entities, or GSEs, Fannie Mae and Freddie Mac which operated separately but provided the same services.
Both provided extensive liquidity in the mortgage market which meant that lenders could approve a mortgage loan application and as long as the lender approved the loan using standards set forth by either GSE, the loan could be sold to Fannie or Freddie, replenishing their credit lines in order to make still more home loans.
Both worked in tandem to establish universal guidelines and one of those standards was the maximum loan limit for loans purchased. Today, that loan limit is $726,200. Anything above that amount is considered a jumbo loan expect for select higher-cost cities. So what’s the difference? Jumbo loans are underwritten to standards issued by individual mortgage bankers and institutional lenders. Because there are fewer jumbo loans issued each year compared to Fannie and Freddie loans, the rates and terms are a bit more stringent yet not so much so they’re too difficult to qualify for.
For example, the minimum credit score for most jumbo programs is 700 when financing the maximum 95%. When a lender accepts a jumbo loan application the lender orders credit scores from the three credit repositories of Experian, Equifax and TransUnion. Lenders ignore the lowest and highest score and use the middle one. Most jumbo lenders also ask for a down payment of at least 20% of the sales price of the home. These funds must come from the borrower’s own funds such as a checking or savings account or an eligible retirement fund.
When you apply for a jumbo loan you don’t need to specifically find a jumbo lender as most banks and lenders today will accept an application for either a Fannie Mae or Freddie Mac (conventional loan) as well as a jumbo loan. There are however select lenders who can specialize in the jumbo product and even offer certain jumbo loan programs that are difficult to find or cater to a specific class of borrowers. For example, there are jumbo clients who wish to leverage a jumbo purchase as much as possible and hold onto their liquid assets, or cash, instead of using those same funds as a down payment.
For those, there is a program where the buyers only need to make a 5% down payment and not 20 or 30% down. On an $800,000 sales price that’s a difference between a $40,000 down payment and $160,000 or $240,000 down. That’s a lot of money to be tied up in real estate.
This jumbo purchase structure actually uses two mortgage loans, a first and a second. Lenders refer to this financing option as an 80-15-5. These numbers simply mean the first mortgage is at 80% of the sales price of the home and the second at 15%. The 5% represents the down payment made by the borrower.
Besides the 700 minimum credit score, borrowers are asked to occupy the property as their primary residence and their debt to income ratios should be around 43, which means their total monthly credit obligations, including the amounts for principal and interest, property taxes, and insurance plus any other revolving or installment loan payments, should not exceed 43% of their gross monthly income.
There are exceptions to these guidelines and lenders do have some leeway when reviewing a jumbo loan application but in general, these guidelines should be met. However, if you’re in a situation where an exception to a loan requirement might need to be made, speak with a loan officer before you make an offer about your own situation in order to receive your pre-approval.
Questions? We have answers, please contact us about applying at 800-840-6449 today.