The mortgage market today for residential home loans today is broken down into three categories based – Government (FHA, VA, USDA) Conventional and Jumbo loans. Homebuyers in Charlotte will generally choose their loan type based on down payment amount. First-time buyers generally use government-backed loans because of the low, and sometimes zero down payment required.
A standard conforming loan gets its name because it “conforms” to guidelines set by either Fannie Mae or Freddie Mac. The vast majority of home loans today are approved using one of these two sets of requirements. In most parts of the country, Charlotte – Mecklenburg County included, the conforming loan limit is $548,250. However, in certain “high-cost” locations like New York City, this loan limit can be as high as $822,375. Any loan amount greater than that falls into the jumbo category.
When a loan is approved in this fashion, lenders and banks are able to sell the loan. Selling the loan replenishes a lender’s line of credit allowing it to continue in business. Loans are sold individually or in groups. Most loans are ultimately sold to Fannie or Freddie. Jumbo loans, however, do not have such a robust market in which to sell loans. As such, the qualifying guidelines for jumbo loans are a bit more stringent compared to conforming ones.
Lenders who issue jumbo loans essentially do so at their own peril. If the loan ever went into default, the lender would be holding a sizable mortgage in its portfolio with nowhere to sell the loan. Instead, the lender would have to sell the home in the foreclosure market. Jumbo loans are approved just like other mortgages, it’s just that there are some basic characteristics of a jumbo borrower that need to be present.
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Credit score is definitely the main qualifier. Due to the increased risk of jumbo loans, the credit profile of the borrower must meet higher standards compared to a conforming loan. Conforming loans can ask for a minimum credit score of 620 while jumbo credit requirements typically ask for a credit score to be higher. A minimum score of 660-740 is common for jumbo loans, the exact score will greatly depend on the down payment amount.
Higher risk loans with 90% or 95% financing will generally require credit scores above 700 to be approved. Please see all the requirements outlined in the Jumbo Purchase Page. Credit scores come from three different credit repositories, Equifax, TransUnion, and Experian. Each uses the same basic algorithm. The algorithm used is one developed by The FICO Company. The three-digit score can range from 300 to 850.
Down Payment requirements are also greater for jumbo loans compared to conforming ones. Jumbo loans today require a minimum down payment of 5% of the sales price of the home. Conforming loans can be approved with down payments as little as 3% but there is also a mortgage insurance policy required. With a conforming loan, if the balance is at 80 percent or more of the sales price, no mortgage insurance is needed. But loan balances beyond that do require mortgage insurance. There is typically no mortgage insurance (PMI) required for any Jumbo loan regardless of the loan to value.
Debt to Income Ratios can be a bit more stringent compared to a conforming loan. Debt ratios are defined as a percentage of debt compared to monthly income. A debt ratio of 30 is a result of someone with a $3,000 monthly mortgage payment and $10,000 in monthly income. There are two such ratios, one for the mortgage payment which includes amounts for the principal and interest payment, taxes and insurance. This is often referred to as the housing ratio or “front” ratio. The secondary number includes the house payment plus other monthly credit obligations such as a car loan or credit card.
A common debt ratio guideline is 28/36 for conforming loans but recent changes allow the back ratio to be as high as 50, given other positive factors in the file. Jumbo loan guidelines typically won’t approve buyers with debt ratios exceeding 45%. However, just like the credit score requirements, debt ratio requirements can fluctuate based on the down payment amount.
Reserve requirements for jumbo loans are also greater. Reserves are calculated as the number of months’ worth of house payments are left over after the loan has closed. A conforming loan can ask for cash reserves to be maybe two to three months. Jumbo loans can ask for as much as 6-18 months of cash reserves left over after the loan has closed. Again, down payment and the final loan amount is the key variable to determine the exact amount.
Because there can be different guidelines among various jumbo programs, it’s important to speak to a specialist to review all your options. Please connect with us today by calling the number above, or just submit the Quick Contact form on this page.