Qualifying For A Jumbo Loan

A conventional jumbo loan usually requires a strong credit score, reliable income, substantial documented savings, and a low debt-to-income ratio.

If your current credit score is below 700, it will be very difficult to find a lender willing to approve such a substantial non-conforming loan amount. Be prepared to document your income from the past several years, especially if you’re self-employed or own your own business. You’ll also be asked to verify your liquid assets; if you’re for some reason unable to make a mortgage payment with your regular income, lenders want to know you have some back-up funding available. Finally, you’ll need to establish that you have a favorable debt-to-income ratio – your DTI. As the name suggests, your debt-to-income ratio is essentially the total amount you owe all creditors compared to your reliable income over a set period of time. For a jumbo mortgage, your DTI should be around 36% or lower, although some lenders will consider a DTI as high as 43% if other qualifications look strong.

Jumbo loans used to require down payments of 30% or more. In recent years, it’s become possible to secure a conventional jumbo loan with a down payment of as little as 10% or 15% of the total price. While this makes purchasing a more expensive property somewhat easier than a higher down payment would allow, it also means a much higher jumbo loan amount financed over time. That in turn means higher monthly payments and more interest paid over the life of the loan.

Who Are Fannie & Freddie?

Like anything involving mortgages, national economics, and the federal government, it’s easy to get lost in the details when discussing Fannie Mae and Freddie Mac. We’ll focus here on the parts which most impact the jumbo home loan marketplace.

“Fannie Mae” refers to the Federal National Mortgage Association, while “Freddie Mack” is the Federal Home Loan Mortgage Corporation. How similar or different they are depends on who you ask and what you’re needing from them. Both purchase qualifying mortgages from lending institutions in order to indirectly encourage home ownership. Banks and other lenders like the security of knowing they can pass along such large loans – thus reducing their risk and increasing their cash flow. This, in turn, makes them more likely to approve similar mortgages going forward and helps keep interest rates low due to the reduced risk involved.

Fannie and Freddie then repackage their mortgages in such a way that they become part of various investment packages used by hedge funds, pension plans, etc. They’ve been publicly-owned since 2008, meaning they’re run by the federal government as part of promoting the “general welfare” of all citizens. All profits go into the U.S. Treasury.

Why this matters to anyone considering a jumbo mortgage is that Fannie and Freddie only buy “conforming” mortgages – those which meet their own specific requirements. One of these is a limit on the total amount borrowed to purchase a home. The amount is adjusted each year, and allows for higher home prices in some places than others. Loans above this amount are “non-conforming,” meaning they’re ineligible for purchase by Fannie or Freddie. Non-conforming mortgages are a much higher risk for lending institutions, especially those which involve a very large amount to begin with – like jumbo loans. This means it’s more difficult to qualify for a jumbo mortgage loan and you’re likely to face more requirements and higher upfront fees.