What is a jumbo loan?
In most parts of the U.S., “jumbo” means a mortgage larger than $417,000. In some high-cost areas like New York, the threshold is $625,000. This is not a limit on purchase price, but rather on the loan amount. So to buy a home for $500,000 with 20 percent down, a borrower needs $400,000 – not a jumbo loan.
Most jumbo loans are issued to homeowners upgrading to a more valuable home. Lately, however, more and more jumbo loans are being sought by first-time home buyers, particularly those employed in high-tech industries. In some expensive housing markets, like the San Francisco bay area, buyers struggle to find a home priced under the jumbo loan threshold.
Jumbo loan requirements
Requirements for jumbo loans are generally more stringent than for traditional loans. In fact, the larger the jumbo loan, the harder it can be to qualify. For loans up to $1.5 million, most lenders require a credit score of at least 700, a 20 percent down payment and cash reserves sufficient to cover up to 12 months of living expenses. For loans greater than $1.5 million, the lender may require 30 percent down and 18 months of cash reserves. Loans above $2.5 million could require even more cash up front (45 percent or more) and in reserve (up to 36 months).
First-timers will also need to carry a debt-to-income ratio of no more than 42 percent (lower for some lenders).
Low down payment jumbo loans
Some applicants will find jumbo loan lenders who require less than 20 percent down. In these cases, the borrower must be highly qualified – credit score of 720 or higher, significant assets, very solid income potential, and a debt-to-income ratio of no more than 38 percent. The loan, however, may not come with optimal terms. The lender will require private mortgage insurance, and will charge a higher interest rate.
The FHA guarantees jumbo loans of up to $729,750 in some areas. Borrowers only pay 3.5 percent down, but also pay fees and higher rates. Affluent buyers can sometimes finance 100% of a home purchase by using two or more forms of collateral against 20 percent to 40 percent of the loan value. These loans are generally offered by the bank where the borrower holds some assets.
Qualifying for a jumbo loan can be harder for first time buyers, but not impossible. Lenders want to see that the borrower will be able to handle the hefty payments, particularly if he or she was previously renting for a much lower monthly amount. Transitioning to a high-income lifestyle can be challenging, and not everyone manages well.
Considerations for the first-time home buyer or the borrower seeking her first jumbo loan:
Build up your cash reserve. The best jumbo loans are for 65 percent of a home’s value (compared with 80 percent for a traditional loan). That means you’ll need to make a down payment of at least 35 percent, or you may need to seek out a second loan to bring down the loan-to-value ratio on the primary mortgage.
Factor in all costs. An expensive home may require immediate remodeling, decorating and furnishing. Don’t forget to calculate any HOA fees and other monthly expenses, like landscaping services or a bigger utility bill. And set aside a prudent reserve for regular maintenance. The lender will want you to show that you understand – and can afford – all of these homeowner expenses.
Shop around. Some lenders are more cautions than others, and some are hesitant to offer jumbo loans to first-time buyers at all. Again, a great credit score is critical. The better your credit, the more lenders will be willing to work with you.