JUMBO
Loan Guidelines

A jumbo mortgage is a home loan that exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA), making it ineligible for purchase by Fannie Mae or Freddie Mac. These loans are designed for high-value properties and are often used by borrowers purchasing luxury homes or homes in expensive real estate markets. Because jumbo loans represent a higher risk for lenders, the underwriting guidelines for these loans are more stringent than for conforming loans. Understanding these guidelines is crucial for borrowers seeking to qualify for a jumbo mortgage. Below are some of the key areas of focus in jumbo mortgage underwriting.

Credit Score
One of the primary factors considered in the underwriting process for a jumbo mortgage is the borrower’s credit score. Lenders typically require higher credit scores for jumbo loans than for conforming loans. Most lenders look for a credit score of at least 700, although some may require a score of 720 or higher. This is because the larger loan amounts represent more risk, and a higher credit score demonstrates the borrower’s ability to manage debt responsibly.

Debt-to-Income (DTI) Ratio
Jumbo mortgage lenders also place a strong emphasis on the borrower’s debt-to-income (DTI) ratio, which is a measure of how much of the borrower’s income goes toward debt payments. The lower the DTI ratio, the better, as it indicates that the borrower has enough income to comfortably handle the larger mortgage payment. For jumbo loans, lenders often prefer a DTI ratio of no more than 43%. Some lenders may be more flexible with a slightly higher DTI if the borrower has substantial reserves or other compensating factors.

Income Documentation
Income verification is another crucial part of the underwriting process for jumbo mortgages. Lenders require detailed documentation to ensure that the borrower has a stable and sufficient income to afford the loan. This usually includes at least two years of tax returns, W-2s (for salaried borrowers), and pay stubs. For self-employed borrowers, additional documentation may be required, such as profit and loss statements or business tax returns. Lenders also want to see a consistent history of earnings, as large fluctuations in income can raise red flags.

Down Payment
Jumbo loans generally require a larger down payment than conforming loans. While conventional loans can often be obtained with as little as 3-5% down, jumbo loans typically require a down payment of at least 15-20%. In some cases, borrowers may be required to put down as much as 25-30%, depending on the loan amount and the borrower’s financial profile. A larger down payment reduces the lender’s risk and shows the borrower’s commitment to the investment.

Reserves and Assets
In addition to a larger down payment, jumbo loan lenders typically require borrowers to have significant cash reserves. This means that after the down payment and closing costs are covered, the borrower must still have a certain amount of liquid assets left over. Reserves are measured in terms of how many months’ worth of mortgage payments the borrower has saved. Lenders may require anywhere from six to twelve months of reserves, depending on the loan size and risk factors. These assets provide an extra cushion for the lender in case of financial hardship.

Property Appraisal
Because jumbo loans involve larger loan amounts, lenders require a comprehensive property appraisal to ensure the home’s value justifies the loan. In some cases, lenders may even request two appraisals, particularly for very high-value properties. The appraisal must support the loan amount, as lenders want to avoid overextending credit on an overvalued property. A thorough inspection of the home’s condition and comparable property values will also be conducted.

Loan Limits
There are no universal limits for jumbo loans, as they exceed the conforming loan limits. The conforming loan limit for 2024 is $766,550 in most parts of the U.S., though it is higher in some high-cost areas. A jumbo loan will exceed this limit, but the specific amount a borrower can qualify for will depend on their financial situation, property value, and the lender’s guidelines.

All loans must be underwritten by the Fannie Mae desktop underwriter system or the Freddie Mac Loan prospector advisor and receive an Approve/Eligible (Fannie Mae) or a Accept/Eligible (Freddie Mac)
– Purchase | Rate and Term refinance | No cash-out refinance eligible
– Minimum Credit score of 660

Salaried | Hourly Borrowers
– Two-year employment history must be documented via the two most recent tax returns
– Previous two years W-2s
– Recent paystubs to illustrate earnings for the previous 30 days

Self-Employed Borrower
– Business must have been in existence for at least two years
– Personal signed individual tax returns as well as the corporate or partnership tax returns for the two most recent tax periods

Properties Listed for Sale
– Primary residence only |Limited Cash-Out | Cash-Out Refinance loans
– The subject property must be taken off the market on or before the loan closing date and the borrower must confirm their intent to occupy the subject property

Multiple financed properties
– Primary residence loan- No limits to the number of financed properties
– 2nd Home | Investment property- maximum 10 financed properties

Student Loans
– Underwriting may use the payment on a current credit report or a recent statement for qualifying purposes– Otherwise 0.5% of the outstanding loan balance reported on the credit report will be calculated to determine the monthly obligation

Qualifying Ratios
– Current guidelines refer to the Fannie Mae or Freddie Mac automated underwriting response
– Traditional guidelines are capped between 45-50% maximum debt to income

Maximum Cash-out
– Primary $500,000 | Secondary $400,000 | Investment $400,000

Rental Income
– Will be determined by the supplemental income/loss reported on the respective Schedule E from the two previous tax periods

Reserves
– Based upon the Fannie Mae or Freddie Mac automated underwriting response – Typical reserves is 0-6 months for Owner occupied, 6 months for 2nd Home and Investment

Appraisal
All loans will require a traditional Fannie Mae form 1073 | Freddie Mac form 465 appraisal report, unless the automated underwriting indicates that a valuation documentation will not be required with what is commonly know as an appraisal waiver or property inspection waiver

Purchase | Rate and Term Refinance

Qualifying for a jumbo mortgage requires a strong financial profile, including a high credit score, low DTI ratio, substantial down payment, and significant reserves. The underwriting guidelines for jumbo loans are stricter than for conforming loans, reflecting the increased risk associated with larger loan amounts. Borrowers should be prepared to provide detailed income documentation and go through a thorough appraisal process. Working with a lender experienced in jumbo loans can help navigate these requirements and secure financing for high-value properties.