How do you qualify for a jumbo loan?
If you want to buy a particularly expensive home -- one above the conforming loan limits in the state and county where you’re buying -- you’ll likely need a jumbo loan. While jumbo loans can often allow you to purchase a bigger and better home, they can also be more difficult to qualify for. Here are the basics of qualification for a jumbo loan.
Conforming Loan Limits and Jumbo Loans
Just to recap, the conforming loan limit is a limit set by government-sponsored loan insurers Fannie Mae and Freddie Mac. If a loan goes above these amounts, they will not purchase it. Right now, in most of the United States, the conforming loan limit is $453,100.
Despite that, there are a variety of high-cost areas, such as many parts of New York City, Hawaii, Alaska, and Los Angeles, which have higher limits. For example, the conforming loan limit in Los Angeles is $679,650, while the conforming loan limit in Honolulu is $721,050.
Jumbo Loan Eligibility Requirements
Since a lender is taking significantly more risk by offering you a home loan above the limits set by Fannie Mae and Freddie Mac, they’ll want to feel confident that you’ll be able to pay back the loan without any issues. To compensate for that risk, they’ll likely want you to:
Provide a down payment between 10 - 20%
Provide detailed income documentation
Consider taking on an adjustable-rate mortgage (since it may be easier to get than a fixed-rate jumbo loan)
Have a mortgage payment that’s no more than 38 - 45% of your monthly pre-tax income (depending on the lender and loan amount)
Have a good credit score, usually 700 or above (though some lenders may go as low as 660)
Have an emergency cash fund of at least 10% of the loan amount in a bank or brokerage account
Jumbo Loan Rates Have Decreased in Recent Years
While jumbo loan rates used to be significantly higher than their conventional counterparts, the rate difference between these two products has fallen significantly in the last few years. After the financial crisis, lenders trying to reduce risk bumped up jumbo interest rates in order to protect themselves, but now that the market seems to have stabilized, they’ve decided to make jumbo loans more accessible in hopes of increasing their profits.
This also means that fixed rate jumbo loans, which were once quite uncommon, are growing in popularity, and might not be much harder to get than their adjustable-rate counterparts.
What If I Can’t Qualify for a Jumbo Loan?
If you can’t seem to qualify for a jumbo loan, but still want to purchase a home with a loan outside the conforming limit for your area, a piggyback loan like an 80-10-10 could be the right choice for you.
In an 80-10-10 loan, a borrower typically takes out a traditional, conforming loan for 80% of the home’s price, a second mortgage (usually a HELOC), for 10% of the price of the home, and pays the 10% of the home’s price as a down payment. That additional 10% can easily help you get around conforming loan limits -- as long as you don’t want a loan that significantly exceeds them.