When home prices rise and the need for jumbo loans increase, often times investors are more willing to relax jumbo loan requirements in order to get people into homes. Although jumbo loans exceed the conforming loan limits established by government-sponsored enterprises they are still available for home purchases but often have more stringent requirements. The limits are currently set at $417,000, but in some states such as California, there are exceptions to the limit that takes into account areas that maintain a higher standard of living resulting in higher-priced homes.
In most California counties such as Riverside and San Bernardino that limit is set at the standard $417,000, but in Los Angeles, Orange and San Francisco counties a loan is considered jumbo if the single-family residence exceeds $625,500. Other locations have loan limits ranging between $500,000 and $600,000.
Jumbo loan requirements often include:
• Debt-to-income ratio no higher than 43 percent – the total monthly house payment and all other installment and reviving debt payments can’t exceed 43 percent of pretax income (this does not include utilities and other recurring living expenses);
• FICO credit score of at least 700;
• Down payment of at least 20 percent;
• Proof of income and cash reserves of six – 18 months of mortgage payments, including taxes and fees.
Jumbo loan requirements extend beyond the borrower’s ability to repay the loan and require additional documentation past what is needed for standard home loans. Lenders prefer that luxury homebuyers have larger reserves in case the property goes into foreclosure.
One example of a major lender loosening up jumbo loan requirements is Wells Fargo Home Mortgage relaxed its minimum down-payment requirement. Rather than its previous minimum of 20% down, Wells is now accepting 15% on primary residences “in most markets around the country,” company spokesman Tom Goyda said. There is no mortgage insurance requirement, but applicants must have a minimum 740 FICO score, no higher than a 35% total household debt-to-income ratio and 12 months of financial reserves available to them. Basically, what Wells Fargo is saying is that if you are a strong candidate on most criteria, we’ll give you the benefit of the doubt and lower the amount of cash you need to bring to the table.
Many companies claim they can do better for well-qualified applicants such as offering 10 percent down payments for jumbo loans: a standard first mortgage and an accompanying second mortgage or deed of trust that in combination create a 90% loan-to-value ratio for the borrower.
Jumbo loan requirements are still more stringent than that of a conventional loan, but lenders are loosening requirements so they are definitely an option worth exploring. Lenders are able to profit from jumbo loans despite offering them at lower interest rates, a plus for the borrower. But rates on deposits will rise someday, and lenders are preparing for that by pushing jumbo ARMs whose rates will rise when rates paid on deposits rise.
Jumbo loan requirements can make it more difficult for the average person to purchase a luxury home, but for those with the resources and favorable credit scores a jumbo loan is the means to purchase a home in a higher-end market.
The good news for homebuyers looking to purchase the home of their dreams is that many lenders are easing jumbo loan requirements and have some flexibility when approving borrowers for a jumbo loan. With requirements easing this is a great time to get into the market and find out if jumbo loan requirements will permit you to purchase the home of your dreams.