Sometimes lenders refer to qualifying for a jumbo mortgage as the “Three C’s” which is a moniker for Collateral, Capacity, and Character. The phrase is a generalization but overall it’s a phrase heard often in the lending world. Collateral refers to not just the property being financed but the ownership of cash and liquid assets needed in order to finance a home purchase.
Capacity relates to the borrower being able to prove there is enough monthly income to comfortably make the payments each month in addition to current credit obligations and Character refers to how someone has handled credit obligations in the past. Again, this is a generalization but let’s take a deeper look at how lenders view credit when evaluating a loan application to finance a jumbo purchase in Virginia.
As it relates to collateral, lenders look at sufficient cash to close. With any home loan, there is a down payment required in addition to the funds needed for closing costs. A third allotment is set aside for Jumbo loans and cash reserves. Lenders and banks want to see if there will be savings left over and available to the borrower after the loan has closed and funded. These funds are referred to as “cash reserves” and are identified as a number of months’ worth of mortgage payments.
The amount of mortgage payment reserves will depend on a variety of factors including the buyer’s credit profile, down payment, loan amount, etc. These reserves can also come from non-liquid accounts like IRA, 401K, etc. When verifying sufficient funds to close the bank will look at recent bank statements and compare the deposits with verified income. Mortgage companies can have different down payment requirements and approval guidelines but most do require greater down payment the larger the purchase price.
Homebuyers seeking jumbo financing in high-cost locations like Virginia Beach, Norfolk, Richmond, etc. have options up to 95% financing. Both fixed rate and adjustable loan terms with no mortgage insurance. Learn more about all the Jumbo Purchase requirements here.
Character looks at how the borrower treats current and previous credit accounts. Someone who opens up a credit card and is typically late every month might not have high regard for a responsible credit history compared to someone who does pay on or before the due date every single time.
Today this character is expressed as a credit score, that will fall somewhere between 300 and 850. Most jumbo 10% down and 5% down Jumbo loans require a minimum credit score of 680 in order to qualify. There are five factors that go into a credit score but payment history and availability account for two-thirds of the final score.
Capacity compares the gross monthly income with monthly credit obligations. Lenders want to make sure there is enough income to make the payments each month while leaving some extra cash each month. To do this, the lender will review the loan application and consider the listed monthly income. If the application shows the borrower makes $10,000 each month the lender will ask for the most recent paycheck stubs covering a 30-day period along with W2 forms from the previous two years.
Jumbo loan guidelines require the applicant to be employed for at least two years. For self-employed borrowers, mortgage lenders ask for the most recent two years of federal income tax returns both personal and business and average the income over a two-year period to arrive at a monthly amount.
The lender then provides a preapproval letter based upon the verified income considering the proposed principal and interest payment along with monthly amounts for taxes and insurance. In addition, the lender will then add other monthly credit obligations to the total mortgage payment to arrive at a total debt-to-income ratio. If gross monthly income is $10,000 and total credit obligations, including the mortgage payment, add up to $4,000, the debt ratio is 40%, or 40. Most jumbo lenders approve debt ratios of around 40 but can go even higher if there are other compensating factors to offset the higher relative debt load.
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