Understanding Jumbo Loans and How to Qualify

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October 22, 2016
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As home prices and incomes increase, more and more homeowners are learning that the loan they want for the home of their dreams qualifies as what is called a “jumbo loan.” Before you give up on the dream of getting that home you’ve always wanted, it’s important to understand what makes a mortgage loan “jumbo”, and how you can qualify for one.

What’s a Jumbo Loan?

As its name would suggest, a jumbo loan is any loan that is larger than what is considered a normal mortgage loan. Fannie Mae and Freddie Mac have “conforming limits” on what they will buy, so if the cost of your home falls outside of the limit, you will need a different type of loan. There isn’t a hard and fast number for what is outside of the conforming limit—it varies by location—but for most places it’s a loan that is over $417,000. However if you are looking for real estate in a housing market where average prices are much higher, such as Los Angeles, that limit might be upwards of $730,000. If you’re not sure whether your housing market has limits higher than the nationwide average, talk to your mortgage lender.

Qualifying for a Jumbo Loan

At the peak of the housing bubble when home prices were skyrocketing and mortgages were easier to come by, many lenders relaxed their standards to allow borrowers to get jumbo loans with fewer restrictions. After the housing market crash, jumbo loans didn’t disappear, but lenders have become more stringent about who can qualify. Before you can get a jumbo loan you will need:

  • A minimum of 20 percent as a down payment
  • An excellent credit rating (usually 720 or higher)
  • Clear documentation of your income to be able to afford a loan that size
  • The ability to get an adjustable-rate mortgage (ARM), since fixed-rate jumbo loans are not as common
  • Mortgage payments at or below 38 percent of your monthly pre-tax income

Most of the time the lender for a jumbo loan will be a larger bank, and these loans tend to be more of an old-fashioned lending style than other mortgages, meaning that the bank probably won’t sell it. Instead they will retain it on their books and collect interest, so you may be able to get different rates from different lenders if you take time to shop around. Banks are also looking at the housing market and potential pricing volatility before deciding whether to lend, since these properties are harder to sell after a foreclosure.

If you are in the market for a home that exceeds conforming limits, find out more about whether you can qualify for a jumbo loan by talking to a residential mortgage lender today.

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