Depending upon where your prospective property is located, when financing the purchase you’ll either get a conforming loan or a jumbo. Does that matter very much? Maybe. Yet while the approval process today is very similar to a conforming loan, if you’ve never applied for a jumbo home loan or you’re just thinking of financing a higher end home, it helps to know what to expect.
Each year since 2008, the Federal Housing Finance Agency, or FHFA, sets the conforming loan limit for the coming year and takes effect on January 1. FHFA compares the average year over year home price and adjusts the new conforming loan limit accordingly. In 2017, we saw an increase go from $417,000 to $424,100 to match the percentage increase from 2015 to 2016. Anything above this amount is considered a jumbo loan. In areas that are deemed “high cost,” the conforming limit is higher. So what’s the difference? Why is this important?
Jumbo interest rates are a bit higher compared to a conforming loan. Not by a lot but higher nonetheless. If someone is looking at a home listed at say $500,000, then getting the conforming rate would mean either putting down $75,900 or structuring two mortgages to keep the first loan at the conforming limit, avoiding private mortgage insurance. This situation really does require you to speak with your loan officer to discuss your options. That said, should you decide to go the jumbo route, here’s what you can expect.
Most jumbo loans ask for a minimum down payment of at least 20 percent of the sales price. In addition to the down payment, you’ll need closing costs. And you’ll also need what is referred to as “cash reserves.” While conforming loans also like to see a little money left in the bank after closing, jumbo loans can require a minimum of anywhere from six to 12 months’ worth of housing payments in a liquid account after the loan has funded. There are specialty jumbo loan programs that ask for less than a 20 percent down payment but if you want the best interest rate and no mortgage insurance, the 20 percent down option is probably your better bet. Minimum credit score requirements may also be higher compared to a conforming mortgage loan.
When documenting your loan, this is where the jumbo loan is very similar to other programs. You’ll need to document a two-year employment and income history as well as copies of recent pay check stubs. If self-employed, it’s time to start digging out your two most recent federal income tax returns, both personal and business. Also put together a year-to-date P&L. Get copies of your most recent bank statements, investment or cash accounts to be used for the purchase, as well. Call your insurance agent and talk about your plans so you can get an idea what your insurance premium will be.
Jumbo loans follow most of the documentation guidelines that conforming loans do, but different jumbo lenders can have their own internal guidelines. To find out exactly what is needed, your loan officer can fill in the blanks for you.