A jumbo loan is a type of mortgage that exceeds the conforming loan limits of Fannie Mae and Freddie Mac. Jumbo loans are designed to finance luxury properties and come with special underwriting requirements and tax implications. The value of a jumbo mortgage varies by state – and even county – and is based on the home value in the specific county.
If you’re looking to buy a home that costs close to half a million dollars or more, you’re probably going to need to apply for a jumbo mortgage. You’ll face much more rigorous credit requirements than if you were applying for a conventional loan because jumbo loans carry more risk, since they aren’t guaranteed by Fannie Mae or Freddie Mac.
To get approved for a jumbo mortgage, you’ll have to have a credit score of 700 or higher, and a very low debt-to-income ratio. The DTI should be under 43% and it’s preferable to be close to 36%. You’ll also need to prove that you have enough cash on hand to cover your payments. Specific income and cash reserves depend on the size of the overall loan, but you are required to submit 30 days of pay stubs and 2 years of W-2 tax returns. You also need to prove ownership of liquid assets and cash reserves equal to six months of mortgage payments.
Who Should Take Out A Jumbo Loan?
How much you borrow depends on how much you make, your current assets, and the property you’re looking to buy. Jumbo mortgages are most appropriate for high income earners who make between $250,000 and $500,000 a year, but haven’t yet saved up enough money to buy a home in cash. But just because you take out a Jumbo loan, don’t expect a huge tax break. The cap on the interest mortgage deduction is limited to $750,000 in new mortgage debt.
Jumbo Loan Rates
Traditionally jumbo loans carried higher interest rates than conventional mortgages, but the gap has been closing in recent years. Today the rate on a jumbo loan mortgage is around the same as that of a conventional mortgage and in some cases, lower.
Down Payment on a Jumbo Loan
Down payment requirements have eased up over time. In the past, jumbo mortgage often required a down payment of 30% of the purchase price. Now, you can put down as little as 10% to 15%.