What Are Jumbo Loans With 5% Down?
A jumbo mortgage or a jumbo loan is one that exceeds the Federal Housing Finance Agencies’ limits. They cannot be secured by institutions like Freddie Mac or Fannie Mae, which makes them much riskier for lenders to take on.
What are the Jumbo Loan Parameters?
Fannie Mae and Freddie Mac have parameters outlining how large of a loan people can take out for their mortgage. The limits are called “conforming loan limits.” When mortgage amounts fall under the limits, they are insured to protect the lender. Jumbo loans exist outside of those parameters and are sometimes called “non-conforming loans.”
The limits of conforming loans vary from one state to another.
In 2021, a person can only borrow up to $548,250 to buy a single-family unit in most states. Other states, like Hawaii and Alaska, allow up to $822,375. Multi-family unit limits go higher.
Jumbo Loan Rates
Jumbo loans command a higher interest rate because they have more risk involved for the lender. But not all jumbo loan rates are that much higher. You can get either a fixed or adjustable loan rate for a jumbo loan. However, they do have stricter requirements attached to the loan, depending on the type of property, credit score, debt-to-income ratio, and down payment amount.
When you take out a jumbo loan, a higher down payment is typically required when compared to other traditional loans. Most lenders will ask for as much as 20% down to secure a jumbo loan for a single-family unit. The down payment is determined by your credit history and the loan amount. You need a FICO score of 740 or more, or better than 680, with 5% down, on average. If you have a score of less than 640, a down payment of 10% is required.
For any traditional loan, a credit score is a key factor, and this is especially so for a jumbo loan. A person’s credit score is a numeric indication of how reliable a borrower is. A credit score can range from 300-850. Many factors play a role in determining a credit score. In most cases, you need a minimum of a 700 credit score for a jumbo loan for a one or multi-unit dwelling and the loan cannot exceed $1M. Anything from $1M to $1.5M requires a score of 720 or greater. Jumbo loans between $1.5M and $2M require a credit score of 740 or more. If you are taking out a jumbo loan on a second home, your credit score minimum is anywhere from 720-740 or more depending on the loan amount.
A debt-to-income ratio is a value used to compare what someone has coming in every month and what they have going out. It is calculated by taking your minimum monthly payment amounts before taxes. Therefore, if your bills total $1,000 a month, and you make $2,000 before taxes are taken out, your debt-to-income ratio is 50%. Low debt-to-income ratios are required to obtain a jumbo loan. Typically, a traditional lender will require a DTI that is 45% or less to qualify for cash-out refinance or purchase. One way to get around a higher DTI is to put down a higher down payment or to have a good credit score.
Hurdles to Obtaining a Jumbo Loan
Lenders May Ask for Cash Reserves
Lenders will want to see your bank statements to get a full picture of your financial health. Most lenders will ask for buyers to have at least 12 months’ worth of savings in reserve to cover a loan. Lenders might also take into account up to 70% of your retirement account accumulation. There are also occasions where gift or business funds might be considered as reserves.
Lenders only offer jumbo loans to those buyers who have both regular and predictable income. They often require a minimum of two years of tax returns and 1099s for a conventional loan. For a jumbo loan, the lender might also require that you verify that your income will not change once you are approved for the loan.
Jumbo loans, unlike conventional ones, require manual underwriting. A professional will sift through your credit history, bank statements, and assets to ensure that there isn’t anything they are missing that might flag you as an increased risk. If you have any blips on your credit history, you will have a hard time getting approved.
Higher Closing Costs
Closing costs are usually anywhere between 3-6% of the total amount of the loan, but they are higher for jumbo loans. If you are taking out a loan of $500,000, you can typically estimate as much as $10k-$25k at closing.
Jumbo loans are loans that exceed a specific loan amount. Because they are considered riskier than other types of loans, they may not be insurable.