Jumbo loan approval is based on the same basic formula as any other mortgage. Eligibility depends mainly on income, cash reserves, credit score, debt, employment status, property type and property use.
Qualifying for a jumbo loan tends to be a little harder than qualifying for a conforming loan. When a loan falls outside the parameters set by the government, the lender has to mitigate financial risk in other ways. Jumbo loans are manually underwritten, and all factors are considered carefully; the qualifications tend to be more stringent.
"The documentation requirements are much higher on a jumbo loan than on a conforming loan," says David Battany, executive vice president, capital markets at Guild Mortgage Co., "particularly after the housing crisis. This can be a surprise for some borrowers. The underwriter will examine at a much deeper level of detail the applicant's tax returns, assets and other qualifications."
You'll need to meet, and in some cases exceed, the standard requirements for a conforming mortgage. Each lender sets its own eligibility criteria.
Moye says, "Usually your credit score has a lot more weight in a jumbo application. Reserves also have more weight, as do prior credit events. If you have a bankruptcy, it has to be older. A foreclosure can disqualify you."
Keep in mind that if your application is weak in one area, you may be able to make up for that weakness with a stronger showing in another. For example, if your credit score is on the low side, you may qualify with a larger down payment.
Credit score requirements are higher for a jumbo loan. Some conforming mortgage programs are available to applicants with a credit score as low as 500, but for a standard jumbo loan, you'll usually need a credit score of at least 680. Many jumbo loans require a score of 700 to 720 or higher.
Generally speaking, the credit score requirement will reflect the loan amount, the size of the down payment and the amount of debt you carry. A lower credit score is not an insurmountable barrier to a jumbo loan. Although the best loan products are offered to applicants with higher scores, many programs are tailored to borrowers with weaker credit.
The allowable debt-to-income ratio may be lower for a jumbo loan than for a conforming mortgage. A high DTI, if allowed, will probably result in a more expensive loan. In an example offered by Moye, an $800,000 loan in San Diego jumped from a best interest rate of 4.75 percent to 5.375 percent when the DTI increased from 43 percent to 48 percent.
For qualified jumbo loans – meaning the loan has features that make it more likely that you can afford to repay it – expect to see a DTI limit of 43 to 45 percent or lower.
Under most circumstances, mortgage lenders want the applicant to have some cash available in case of an emergency. For conforming loans, the cash reserve requirement may be as little as one month's housing expenses. Your jumbo mortgage lender will probably require between three and 24 months' reserves.
You can satisfy the reserve requirement in several ways. Obviously, money in the bank qualifies as a liquid asset. If you have a retirement or other investment account, the lender may consider 70 percent of your balance to be liquid; you don't have to cash out the account for the purposes of the mortgage application. In some cases, gift or business funds can be used to meet the reserve requirement.
An exception to the reserves requirement may be granted if your DTI is very low or your down payment is high.
A 20 percent down payment is the gold standard for mortgages, and in the not-too-distant past, some jumbo mortgage lenders required even more. Today, however, jumbo loans are available with much less of your own funds down.
Some borrowers who want to avoid paying private mortgage insurance, or PMI – required when a loan is more than 80 percent of the purchase price – without a 20 percent down payment take out a piggyback loan. A piggyback loan is a second mortgage taken at the same time as the first mortgage to cover a portion of the purchase price. For example, a first mortgage for 80 percent of the purchase price, a second mortgage for 10 percent and a down payment of 10 percent is a common scenario.
You should ask your lender whether down payment assistance is permitted. Most allow at least a portion to come from gifted funds.
Expect to pay at least 5 percent down from your own funds. If you make a down payment lower than 20 percent, you will probably pay a higher interest rate or mortgage insurance premiums, or both.
Some lenders, including Guild Mortgage and SoFi, offer 10 percent down jumbo loans with no mortgage insurance requirement. SoFi's 10 percent down jumbo loan has a maximum loan value of $3 million.