Complete Guide - What is a Jumbo Loan?

If you are considering buying your million-dollar dream home, a jumbo loan from mortgage lenders is the best way to finance your purchase.

What do you mean by a jumbo loan?

A mortgage that has a higher borrowing limit than other conventional home loans is known as a jumbo loan. They can be fixed or variable. Certain states have confirming loan limits and the loans that exceed these confirming limits are said to be jumbo loans.

Talking from a lender’s perspective, these loans are riskier as compared to standard loans because of their higher limits. Borrowers too should be able to meet tougher standards for getting approval. In certain cases, jumbo loans have more advantages than conventional loans.  

Texas Mortgage Lenders have given you an in-depth view of jumbo loans in this article. Keep reading to find out.

How does the Jumbo Loan work?

If you have your eyes set on the home which costs half a million dollars or more and you do not have enough funds in your account, a Texas jumbo loan will be your savior. When getting a jumbo loan, there are certain rigorous credit requirements that you will face as compared to a conventional home loan. That is because there are more credit risks associated with a jumbo loan because of no guarantee. There is more risk because more money is involved.

In order to qualify for a jumbo loan, you need a stellar credit score. It should be at least 700 or above and at least a DTI ratio. It should be under 43% and closer to 36%. Even though they are nonconforming mortgages, jumbo loans still fall under the guidelines of a qualified mortgage.

You will also have to prove that you have accessible cash to hand over the payments. These payments will be high if you are opting for a standard 30 year fixed rate loan from your local mortgage lenders. Income levels and reserves will depend on the size of the loan and the borrowers will need 30 days of pay stubs and tax forms that stretch back to 2 years. For self-employed professionals, the income requirements will be greater. They need 2 years of tax returns and a minimum of 2 months of their current bank statements. They also need to provide provable liquid assets and cash reserves that must equal to the 6 months of mortgage payments. Apart from this, all the applicants must have proper documentation on all the other loans that they have held in the past and proof of ownership for non-liquid assets like real estate.

How can you qualify for a jumbo loan?

Jumbo loans have very strict underwriting criteria because the loans are larger and have high risks for the lenders.

Credit Score -

To qualify for a jumbo loan, the lenders need a credit score of 700 or sometimes as high as 720.

Cash reserves -

You will be approved for a jumbo loan if you have a good amount of cash in your bank. Sometimes, the lenders may even ask you to show your cash reserves and hence they should be enough to cover one year of mortgage payments.

Debt-to-income ratio -

Lenders will also consider your debt-to-income or DTI ratio to make sure that you are not over-leveraged. They can be flexible if you have surplus cash reserves.

Documentation -

To give the lenders proof of your financial health, you will have to provide extensive documentation, more than what you would provide otherwise for a conventional home loan. You should also be prepared to hand over your tax returns, bank statements and information, and also details of your investment accounts.

Appraisals -

For the property you are planning to get your hands on, certain lenders will also require second home appraisals.

How high are the interest rates in the Jumbo Loans?

Mortgage rates for jumbo loans are significantly higher than conventional home loans. The rates are high because of the higher risk factors involved for the lenders. Over the recent years, the interest rates on jumbo loans have become more competitive. There are cases where jumbo loans offer lower interest rates than conventional mortgages.

The bottom line -

During the pandemic, a lot of lenders have placed strict requirements on borrowers who want jumbo loans. But, it is always important to do your due diligence and make sure whether the current requirements of the lender match what is written on their websites. You can take some time, if necessary, to boost your credit scores and save more for down payments. When you take these steps it will increase your chances of getting approved for a jumbo loan and score a lower rate.  

Choose your lender wisely. Some may require smaller down payments and higher DTI ratios as compared to others. Some lenders will also give you better rates. Doing your research is the key here.

We at Lone Star Financing are your trusted Texas Mortgage Lenders. No matter what part of Texas you live in, we have all the resources to serve you better. Give us a call today to discuss more in detail about Jumbo Loans.