Jumbo loans come in to play when the property cost exceeds the mortgage conforming limit: They start at $417,000 for most parts of the country and as high as $625,501 in some higher-priced real estate areas.
If you’re planning to buy expensive property, a jumbo loan is a viable option—but qualifying is tougher than it is for a traditional mortgage.
Here are the key factors in qualifying for a jumbo loan.
“Jumbo loans always have more scrutiny than conventional loans,” said Jeremy David Schachter, mortgage adviser and branch manager for Pinnacle Capital Mortgage Corporation.
To qualify for a jumbo loan, you’ll need to be able to prove you have the income and liquid reserves to cover the payments. Traditional borrowers will need recent paystubs dating back 30 days and W2 tax forms stretching back two years to prove income.
“Self-employed borrowers will still have more of a challenge than salary borrowers,” he added.
If you’re self-employed, be ready to show two years of tax returns and at least 60 days of bank statements. You’ll also need liquid assets to qualify: Come prepared with six months of reserves of the new mortgage payments.
Many jumbo loans are qualified mortgages, a system developed by the Consumer Financial Protection Bureau to standardize mortgage terms. If you apply for a qualified mortgage, your debt-to-income ratio cannot exceed 43%.
If your debts push you over the limit, you can still apply for a non-qualified mortgage, but the lender will still need to verify you can comfortably repay the loan.
Due to the higher dollar value of these loans, credit score requirements are higher for jumbo loan applicants. According to Schachter, you’ll need at least a 680 credit score to qualify for most jumbo loans.
However, all lenders set their own credit score requirements, and some lenders may require a higher score for approval.
Qualified mortgage rules have increased the need for documentation. While borrowers may have been approved for a jumbo loan with limited paperwork in the past, that is no longer the case.
When you apply, you’ll need to provide documentation to back up any claim you make, including the following:
Proof of income from all sources
Proof of liquid assets
Documentation on other loans you hold
Proof of ownership of non-liquid assets like other owned properties
While applying may be tougher, jumbo loan borrowers may have one thing to look forward to: lower down payments.
“In the past 20% to 30% [down payment] would be needed for a jumbo loan,” Schachter said. “These days only 10% would be needed with good credit.”
But keep in mind that putting a smaller payment down upfront can affect your mortgage terms. Be sure to read the mortgage documentation carefully.
Updated from an earlier version by Gilan Gertz.