Mortgages come in all types and sizes, from big to small and high-interest to low-interest. The two most common types are jumbo or non-conforming and conforming. To understand the difference between the two, let’s briefly touch on federal loan limits.
The Federal Housing Finance Agency (FHFA) sets loan limits for Fannie Mae and Freddie Mac each year. If a mortgage falls within these limits, it is considered conforming. If it falls outside of these limits, it is considered non-conforming.
The government uses those two businesses to purchase conforming mortgages. This makes regular mortgages less risky for lenders to issue. But what if you need to buy a house that costs more than the limit?
Some lenders will give you a mortgage that’s above the limit set by the FHFA. These are called jumbo mortgages; they’re riskier because they’re not guaranteed or insured. Each lender has its own standards for giving out these loans.
How to Qualify for a Jumbo Mortgage
Jumbo loans have stricter requirements than conforming loans since they’re considered higher risk for the lender. The main qualification differences between jumbo and regular mortgages are listed below.
- Higher Credit Score. A good credit score means you have a history of making payments on time. This may help you get a conventional loan, but you’ll need an excellent credit score to get a jumbo loan. Jumbo loans often require a higher credit score than conventional loans.
- Reserves. Lenders will often look at your reserves when assessing you for a jumbo loan. These reserves act as a safeguard for the lender in case you default on the loan. You will need to make a down payment on your mortgage, regardless of whether it is a conforming or jumbo loan. More often than not, jumbo loans require a larger down payment than conventional loans. It is not uncommon for lenders to expect a minimum down payment of 20 percent for a jumbo loan.
- Debt-to-Income Ratio (DTI). Your debt-to-income ratio is a key factor that lenders consider. It shows them whether you can make all your monthly payments, not just your mortgage. Car payments, credit card bills, and other debts can impact your ability to repay a mortgage. Your DTI helps lenders understand your current debt situation and what you can afford to take on.
- Loan-to-Value Ratio (LTV). Your loan-to-value ratio measures the loan amount vs. the property’s value. To calculate your LTV, divide your total mortgage amount by the appraised value or purchase price of the property, whichever is lower. Jumbo loans may require an LTV of 80 percent (i.e., the loan is only for 80 percent of the price of your home). Some lenders may require an even lower percentage.
- Closing Costs on Jumbo Loans. In short, jumbo mortgages have heftier closing costs than regular mortgages. There’s more to consider, and additional qualification steps take time. You might have to pay for a second home appraisal in addition to the down payment and other closing costs. Lenders do this to protect themselves from some of the risks involved. Ensure you’ve considered all the costs before applying for a jumbo mortgage.
Your Jumbo Loan Experts at The Mortgage City
Loan interest rates are related to market conditions and factors like credit score, down payment, cash assets, and income. Lenders will keep their rates competitive depending on the lender and market conditions. This means that jumbo mortgage rates may be lower than conforming mortgage rates.
If you’re checking out jumbo loans in Michigan, Mortgage City can help you out. We’re a licensed mortgage originator servicing Michigan, Florida, New Hampshire, Ohio, Massachusetts, Texas, California, Indiana, and Colorado. We will walk you through the application process and recommend enhancing your eligibility as a borrower for a jumbo loan. Contact us today at (248) 930-8709 for a consultation.
