Jumbo mortgages are used to finance high-value properties, such as luxury homes or properties in more expensive real estate markets. Unlike other loans, they are not backed by government-sponsored entities (GSEs), so borrowers can procure larger amounts of financing. However, due to the lack of government guarantees, jumbo mortgages tend to have more stringent eligibility criteria.
Loan officers who deal with jumbo loans should have a solid grasp on the unique features, requirements, and challenges of this loan type. In that way, MLOs can provide informed advice and support to borrowers, offering a smooth and successful lending process.
What is a jumbo mortgage?
A jumbo mortgage, also known as a jumbo loan, is a type of home loan that exceeds the conforming loan limits set by government-sponsored lending institutions, such as Fannie Mae and Freddie Mac. The loan limits are in place to set the maximum amount of money that these government-sponsored entities will purchase from lenders. Conforming loan limits are usually based on the median home prices in a specific area. According to Bank of America, the current amount threshold for loan-servicing limits is $726,200 for single-family homes in all states except Hawaii and Alaska, as well as a few federally-designated high-cost markets ($1,089,300). Jumbo loans exceed those amounts. Since jumbo loans are not able to be purchased or secured by Fannie Mae and Freddie Mac, they carry different terms and requirements compared to conforming loans.
The difference between jumbo mortgages and conventional mortgages.
Most buyers are more familiar with conventional loans. Conventional loans are mortgages not guaranteed or insured by a government entity like the Federal Housing Administration (FHA) or the U.S. Department of Veterans Affairs (VA). These loans, unlike jumbo loans, adhere to loan limits set by government-sponsored enterprises.
The benefits of jumbo mortgages.
Jumbo mortgages can be good for borrowers who wish to buy high-value properties and require financing to do so. There is more flexibility because they are not subject to the conforming loan limits, and they offer the ability to customize the terms of the loan structure. For example, borrowers may choose from fixed-rate or adjustable-rate loan terms that allow them to tailor the loan to their specific needs. For lenders, jumbo loans can be beneficial to the underwriting process because they are held within the lender’s own portfolio. Thus, they can shape their criteria to be more lenient or consider borrowers with unique financial situations. For example, some lenders offer specialized jumbo loan products that take assets, investments, and net worth into account, making them a good choice for those who may not have traditional income documentation, such as investment dividends.
How do loan officers work jumbo mortgages?
Loan officers work jumbo mortgages just as they work any other mortgage type. They provide guidance to clients, communicate with the borrower and underwriters, and carry out all the daily duties of an MLO. However, there are certain issues that loan officers must be knowledgeable about as they work with borrowers seeking a jumbo loan.
1. Loan limits. Loan officers should be familiar with the conforming loan limits set by government-sponsored enterprises. They should know the loan limits for the different areas and be able to explain how the jumbo mortgage exceeds the limits.
2. Eligibility criteria. MLOs need to be well-versed in the eligibility criteria for jumbo loans, which are typically stricter than conventional and other loan types. Borrowers need to meet specific requirements, and loan officers need to know what those criteria are and be able to identify if borrowers do not qualify.
3. Financial terms. MLOs should know what the interest rates for jumbo loans are and how they differ from conforming loans. They should also be able to explain how the market, borrower qualifications, and loan-to-value ratios affect the interest rate. Similarly, loan officers need to be knowledgeable about various loan structures available for jumbo mortgages and customization options.
4. Risk assessment. Although underwriters are chiefly responsible for assessing, loan officers should have some knowledge of the risks associated with jumbo loans. They should be able to do a cursory evaluation of their client’s loan file and determine the risk level of the application. They should also be well-versed in mitigation strategies.
5. Appraisals. Some lenders may require two appraisals if the borrower is seeking a jumbo loan. Generally, this is because the properties in question are being financed for such high amounts.
Steps in the jumbo loan process.
The process of acquiring a jumbo loan is similar to applying for other types of mortgages. The difference is more apparent in the details and the process can be more extensive and come with more scrutiny. Borrowers can expect the following steps in the approval process.
1. Application. The borrower submits a loan application to the lender, complete with personal and financial information. Information about the property will also be included.
2. Documentation. The borrower will need to present income verification documents, asset statements, and other relevant information as requested by the lender.
3. Credit check. The lender will review the borrower's credit history to assess their creditworthiness.
4. Underwriting. The lender’s underwriter will evaluate the borrower’s application, documentation, and creditworthiness. They’ll analyze the application and determine if the borrower can repay the loan. They will also review the property appraisal that the lender orders.
5. Appraisal. The lender will order at least one appraisal of the property to determine its value. An appraiser will assess the property’s location, condition, and comparables and write an estimate of its fair market value; this is all done to ensure that the loan-to-value ratio (LTV) is enough for the property to be the collateral for the loan.
6. Title search. The lender will do a title search to verify ownership of the property and uncover any encumbrances or liens. Title insurance is usually a requirement to protect the borrower and the lender from unforeseen title issues.
7. Decision. The underwriter has finished their analysis and the lender announces a decision. The loan may be approved, approved with conditions, or denied. If there are conditions, the borrower will need to meet the conditions before proceeding with the loan process.
8. Closing. Once the conditions are met and the documents are signed, the lender will grant final approval. The borrower will get a Loan Approval Letter and the lender will prepare the final closing documents. This document outlines the terms and conditions of the loan. The borrower must read and sign, and then the lender will disburse the funds.
Importance of working with an experienced loan officer.
The more experienced a loan officer, the more likely they have honed their skills in managing the mortgage process. They understand the steps, requirements, and potential hurdles that borrowers may face. This knowledge helps them act proactively on their clients’ behalf. For example, jumbo mortgages can present unique challenges and tend to have stricter requirements, demand a large down payment, and undergo a more complex underwriting process. An experienced MLO can help borrowers navigate the potential roadblocks and increase the likelihood of success.
Factors to consider when applying for a jumbo mortgage.
Although the process for applying for jumbo loans is similar to that of conventional loans, jumbo mortgages typically have unique requirements. Here are some of the major variances borrowers can expect.
Credit score
The minimum credit score for a conventional loan will be between 620 and 640. However, to qualify for a jumbo loan, borrowers will need to have at least a 680. It is recommended to have at least 700. (The lower the score, the higher the interest rate.)
Income and employment history.
Jumbo loans are usually pursued to buy luxury homes. So, the income necessary to qualify for the loan amount is going to surpass that of a conventional mortgage. Borrowers will need two years of income verification and self-employed individuals will need to go through the extra screening required to verify their income.
Debt-to-income ratio.
While the required debt-to-income (DTI) ratio for jumbo loans will vary among lenders, most lenders prefer a DTI less than 36%. Conventional mortgages can have a DTI of up to 50%. The DTI ratio factors in all debt, including mortgage, property taxes, and homeowners' insurance.
Down payment and asset reserves.
The down payment that is usually required for a conventional loan ranges from 3% to 20%. For a jumbo loan, the down payment minimum is 10% and can go up to 25%. Asset reserves – such as cash or other valuables borrowers have immediate access to – are also required for either type of loan. For jumbo loans, that requirement can be from six to 12 months' worth of reserves.
Property types.
One of the benefits of jumbo loans is that they are not government-restricted in terms of property type. Therefore, borrowers can utilize them for vacation homes, primary residences, and even investment properties.
The gist.
Despite similar application processes, jumbo mortgages come with their own idiosyncrasies that MLOs should be familiar enough with to explain to prospective borrowers. Due to these loans exceeding the conforming limits of government-sponsored entities, they are accompanied by both benefits and drawbacks. While jumbo mortgages are a good option for those who plan to buy luxury or more costly properties, the financial qualifications, such as credit scores, assets, down payments, and documentation are more stringent than those of a conventional mortgage.
Jumbo mortgage FAQs.
What is the difference between a jumbo mortgage and a conventional mortgage?
Jumbo mortgages are loans that exceed the conforming loan limits set by government-sponsored entities (GSEs) such as Fannie Mae and Freddie Mac.
How high does a credit score need to be to qualify for a jumbo mortgage?
The minimum is 680. However, the closer a borrower is to the minimum, the more likely they’ll end up with a higher interest rate. A minimum credit score of 700 is the most desired among lenders.
Is it mandatory to have a 20% down payment for a jumbo mortgage?
Down payments for jumbo mortgages range from 10% - 25%. Most lenders require at least 20% for a single-family home, while second homes or multi-family properties may require more.
Can I use my retirement savings for a down payment on a jumbo mortgage?
Generally, yes. However, they should use caution due to certain penalties associated with early withdrawals from 401K and IRA accounts.
What is the debt-to-income ratio requirement for a jumbo mortgage?
The debt-to-income ratio for a jumbo mortgage will vary according to the lender. However, most lenders prefer that the DTI be no higher than 36%.
