Mortgages are typically divided into two categories- conforming and jumbo. A conforming loan is one where the maximum loan amount is $484,350 for most parts of the country. In higher cost areas where the median home value is higher than the norm, the conforming limit rises as high as $726,525. Conforming loans are by far the most popular, taking up nearly two-thirds of residential market share. But in areas where homes are more expensive, jumbo loans begin to take hold. While conforming and jumbo loans both are approved using a similar process, there are some characteristics of a jumbo borrower that are more common compared to someone taking out a smaller loan amount.
Credit. One aspect of a jumbo borrower is the overall credit profile. Conforming loan guidelines can accept a minimum credit score of as low as 620, or even a bit lower given certain exceptions. With a jumbo loan, minimum credit scores can be as high as 700 to 720 with jumbo borrowers getting a slightly better rate if the scores are above 740 in many cases. When there are two or more borrowers on the same application, the lender will use the lowest middle score of the three. The three credit scores are provided from each of the credit repositories of Equifax, Experian and TransUnion.
Down Payment. Jumbo borrowers will be asked for a larger down payment compared to a conforming loan as well as showing additional cash reserves. A jumbo loan is limited to 80 percent of the value of the property which then means at least a 20 percent down payment. Rates get slightly better with a down payment of 25 percent or better. Cash reserves are also required. Cash reserves are defined as the number of months of house payments are readily available after the loan has closed. Jumbo borrowers typically will have more available liquid assets to close on a home.
Employment. Many jumbo borrowers are self-employed or a licensed professional. This is in contrast to someone who receives a regular paycheck from an employer. Being self-employed as a doctor for example brings in higher earnings compared to someone working as an employee or office manager. Jumbo guidelines also ask the individual to have at least two years of self-employment.
Debt Ratios. Conventional guidelines recently changed to allow debt-to-income, or DTI ratios be as high as 50. That means total monthly debt should not exceed 50 percent of qualifying income. Jumbo lenders have a bit more leeway, but jumbo loans will ask for a debt ratio to be a bit lower than 50. However, if there are other positive factors in the loan file such as a high credit score or larger down payment, jumbo guidelines will allow a lender to make an exception. Higher income earners often have lower DTI numbers compared to a non-jumbo borrower.
Again, these are all general guidelines and lenders typically have the ability to approve a jumbo loan that would not make it past conforming qualifications. Because a jumbo loan does not have to conform to certain guidelines compared to conforming mortgages, exceptions to loan approvals are common, especially with someone with other positive compensating factors in the loan file.