With limited inventory and an increasing number of buyers looking to purchase, home prices continue to soar in America’s most competitive markets. As such, there has been an ever-increasing number of Jumbo mortgages utilized to finance home purchases.
This poses the questions; what is a Jumbo loan, and why is a Jumbo loan important to plan for if you live in one of America’s most competitive markets? Well, if you are a buyer in a market such as Denver, CO where the median home price has increased north of $600,000 in 2021, a Jumbo loan might be necessary to purchase the home of your dreams. This post will first and foremost define a Jumbo loan, as well as design a path for future homebuyers to prepare for a Jumbo mortgage.
As of November 2021, a loan that exceeds the limits set forth by the Federal Housing Financing Agency (“FHFA”) of $625,000 ($647,200 in 2022) for Denver, CO, is considered a Jumbo loan. However, the Jumbo threshold varies by county/state. Jumbo mortgages are not eligible to be purchased by Fannie Mae or Freddie Mac and often require manual underwriting, as opposed to Automatic Underwriting Systems (“AUS”) typically utilized for conventional loans. As such, Jumbo regulations and guidelines vary by the respective bank/investor willing to purchase the loans upon funding. Jumbo’s can be either fixed, adjustable or interest only products. While the eligibility between products is fairly consistent, minor variances exist when considering the purchase of a Primary, Secondary, or Investment property, as well as a Rate and Term or Cash-Out Refinance.
The question now stands, how should you prepare for a Jumbo loan? First off, your FICO score must be a minimum of 680 with enough funds for a 30% down payment on the residence. As credit improves, product variety unfolds, and the option to put less money down become available. For instance, some products may allow for 10% down with a credit score minimum of 720.
Further, the maximum loan amount for Jumbo products varies depending on several factors, which include being a first-time homebuyer, credit score, Loan-to-Value (“LTV”), and investor. Gift funds may be allowed depending on the investor, but most products require a minimum 5% borrower contribution to the down payment.
While reserve requirements vary by investor, most banks require 6 to 24 months of reserves on-hand depending on the LTV and loan amount. For planning purposes, a conservative approach would be to plan for 12 months of reserves based on the entire monthly mortgage payment, inclusive of taxes and insurance. Finally, a two-year stable history of employment is required for most Jumbo products.
A final piece of advice for someone planning for the purchase of their dream home is to speak with a trusted Mortgage Professional early. A Mortgage Professional will have insight as to how to get creative with your home financing and develop a strategy that is best fit for your personal goals and needs. Everyone’s situation is a bit different so develop a plan that is best for you!
Spire Financial (A Division of V.I.P. Mortgage, Inc.) brings lending expertise to you. All of our loan officers offer personalized communication for every client, guiding them through the process. We can show you ways to maximize your finances and unlock future opportunities. Spire Financial keeps you in control of refinancing, debt consolidation, and home equity. Together, we can achieve your financial goals.
V.I.P. Mortgage, Inc. DBA Spire Financial does Business in Accordance with Federal Fair Lending Laws. NMLS ID 145502. For state specific licensing, visit www.vipmtginc.com/national-licenses/. V.I.P. Mortgage, Inc. is not acting on behalf of or at the direction of the FHA/HUD or the Federal Government. This product or service has not been approved or endorsed by any governmental agency, and this offer is not being made by any agency of the government. V.I.P. Mortgage, Inc. is approved to participate in FHA programs but the products and services performed by V.I.P. Mortgage, Inc. are not coming directly from HUD or FHA. Information, rates, and programs are subject to change without notice. All products are subject to credit and property approval. Not all products are available in all states or for all loan amounts. Other restrictions may apply. This is not an offer to enter into an agreement. Not all customers will qualify.