You’ve probably heard the term “jumbo” as it relates to mortgage lending, especially if you live in an area like Florida, California, Massachusetts or New York where home values are much higher compared to other parts of the country. A jumbo loan is one where the loan amount exceeds the local conforming loan limits set by government entities and by Fannie Mae and Freddie Mac. What’s so special about jumbo financing? Nothing really, other than primarily the amount of the mortgage but there are some other general characteristics of jumbo financing compared to other mortgage products in the marketplace.
Today, there are three primary sources of mortgage financing. Those are government-backed, conventional and portfolio loans. Government-backed mortgages are those who guidelines are issued by the VA, FHA and USDA. Conventional loans are those that are approved and guaranteed by the individual lender and carry no government-backed guarantee. Should a conventional loan go into default the lender absorbs the loss with no compensation.
Conventional loans typically follow a predetermined set of guidelines which allows the lender to sell these loans in the secondary markets which in turn replenishes the lender’s credit lines in order to make still more mortgage loans. Portfolio loans are those where the lender is using its own internal lending guidelines to approve a mortgage with no intention of selling the loan but keeping the loan long term and collecting interest each month.
Each mortgage program has its own requirements and one of these requirements is the maximum loan limit set for each loan type. For example, in most parts of the country, the conventional conforming loan limit for 2020 is set at $510,400. Certain parts of the country (California, South Florida, DC, etc) are considered “high cost” which means the home values for the area are higher compared to most other parts of the country. In these areas, the maximum conforming loan limits can be as high as $765,600 and still be eligible for sale to Fannie Mae or Freddie Mac. See all the 2020 conforming loan limits here.
High balance loans will have slightly higher rates than conforming loans in non-high balance areas. When the sales price of the home warrants a mortgage amount that is higher than the conforming or high balance limit, then jumbo loans enter the picture. Jumbo interest rates will be a bit higher than either conforming or high balance and on average can be about 0.25% more than a conforming loan.
Beyond the loan limits, there are other basic characteristics that most jumbo loans carry. For example, jumbo loans can ask for a higher minimum credit score in order to qualify compared to a conforming loan. For example, the minimum credit score for a conforming loan might be 620 but with a jumbo loan, the minimum could be 680 or even higher, depending on the down payment and other factors. When lenders request credit scores from credit agencies during the process of evaluating a jumbo loan application. They will receive three separate scores, one from each of the three credit repositories.
These repositories are Experian, Equifax and TransUnion. All three use the very same algorithm to calculate the three-digit score but due to varying subscriptions and reporting dates, the numbers, while being similar will rarely be the same. For example, a lender requests a credit report and scores from all three and the result is 744, 738 and 752. Contrary to what some believe, these scores are not averaged together. Instead, the lender throws out the highest and lowest score and uses the middle score for qualifying purposes. If there are two borrowers on the same application the lender uses the lower of the two middle scores.
Jumbo loans also compare monthly income and compare that income with the total amount of credit obligations. Lenders will verify income for jumbo loans by reviewing the most recent paycheck stubs covering a 30 day period and formulate the buyer’s gross monthly income. Copies of the last two years of W2 forms will also be required. For self-employed borrowers or for those receiving regular income from sources other than an employer, copies of the two most recent federal income tax returns will be needed along with a year-to-date profit and loss statement.
Many jumbo borrowers are self-employed or otherwise own their own business. Such borrowers can also expect to provide copies of recent business tax returns in addition to personal returns. Lenders will review year-over-year income and determine consistency. If the income from one year to the next the income can be used for qualifying. Income that falls from one year to the next can be a red flag yet if the drop in income is less than 10% from the previous year there shouldn’t be a problem. One can expect however to provide an explanation letter in the loan file that addresses the reason for the decline.
Jumbo guidelines ask lenders to make the determination self-employed or other income is likely to continue into the future, typically for at least three years and can make this determination by showing a consistent history. Lenders take the two years of income, add them together and then divide by 24 (months) to arrive at a qualifying income. Lenders will also consider year-to-date income as part of this calculation.
Jumbo loans can be used to finance more than just a primary residence and may be used to finance a beach or vacation home as a second home or to finance an investment property. Rates for non-owner occupied properties will be slightly higher compared to a primary residence financed with a jumbo loan. Minimum down payments can vary but the most competitive jumbo rates are reserved for those with a down payment amount of 20% of the sales price of the home.
There are other options for jumbo loans using a smaller down payment (5% and 10% down) and involve secondary financing. For example, a qualified borrower can put down 10% of the sales price, financing 80% of the sales price with a first lien mortgage and finance the balance in a subordinate note of 10% of the price of the home. Such an arrangement is referred to as an “80-10-10” This strategy can also be used when the conforming loan limit is at the maximum and finance the balance with a second lien.
This avoids both private mortgage insurance and obtains a slightly favorable conforming interest rate when compared to a jumbo rate. Well qualified buyers can also use this same set up in an 80-15-5 configuration with 5% down payment, up to 95% financing. Please see all the latest 2020 restrictions on Jumbo Purchase Page. All the Jumbo loans are also offered in fixed rates varying in terms from 10 to 30 years as well as adjustable rate mortgages in the form of a hybrid loan.
There can be slight variances among different types of jumbo loans but most follow the same general guidelines. If you’re in the jumbo market and want to know your options, please contact us so we can discuss your needs and I can provide options. Please just submit the Quick Call Form on this page, or call the number above.