As it relates to loan limits to purchase a residential property, there are three maybe four different categories these limits can fall into. Conforming loan limits are those that follow the guidelines set by Fannie Mae and Freddie Mac.
In most of the U.S. the limit is set at $548,250. In other areas that are considered “high cost” due to the overall median home values in the area, Fannie and Freddie both raise this limit as high as $822,375. In Chicago, Illinois and throughout Cook County, the conforming loan cap is the same as most parts of the country at $548,250. Anything above this amount falls into the “jumbo” category.
Government-backed mortgage programs also have their own limits as well. VA loans follow the conforming limit, so in Chicago, and the surrounding areas, the maximum 100% VA loan amount is $548,250. FHA loans can vary county by county based upon the median home price in the area but cannot exceed 65% of the conforming limit. The remaining government-backed loan is the one sponsored by the USDA, yet that program is reserved for properties located in rural areas as designated by the U.S. Census Bureau and cannot be used in the Chicago area.
Home values in many parts of greater Chicago are much greater than the conforming limits where higher-end homes and condos are located. That means jumbo financing is necessary. Jumbo loans also have their limits based upon the amount of down payment, occupancy, among other factors.
Qualifying for a Jumbo Loan
Jumbo loans have similar qualifying characteristics as most any other loan program with a few differences. First, jumbo loans require documentation of income and employment. Guidelines ask there be at least a two-year history of employment verified by two years of W2 forms as well as providing evidence of current gross monthly income along with year-to-date totals on check stubs.
For self-employed buyers, there will need to be two years of income tax returns needed in the file for approval. Determining income from an employer is a relatively simple process as the monthly amount is listed on the check stub. For self-employed borrowers, the process is a little different.
Determining a qualifying income amount for self-employed borrowers means averaging two years of net business income. For example, if in one year the income is $100,000 and the next year $125,000, the lender will divide $225,000 by 24 months, or $9,375 per month.
To verify there are enough funds readily available for a down payment and closing costs, copies of bank and investment statements from the accounts being used for the transaction will be needed. Down payment requirements for jumbo loans can vary, with down payments as low as 5% of the sales price available as long as the property being financed is for an owner-occupied unit.
For second homes and vacation homes, the minimum requirement is 10%. Standard loan closing costs apply. Another cost is not really a cash outlay but does have to be verified. Cash reserves must also be identified and are calculated by the number of months’ worth of mortgage payments, including taxes and insurance, are in a liquid account. If for example the cash reserve requirements for a low down payment jumbo loan in Chicago are 6 months, and the mortgage payment is $4,000, there needs to be $24,000 in a documented account. This is the amount after the down payment and closing costs are taken into account.
When financing a luxury purchase with a 5% down payment, the minimum credit score is 680. If there are two borrowers on the application, the lower of the two will be used for qualifying purposes. If the down payment is more than 5%, then the minimum credit score can be as low as 660. The maximum loan amount for a 5% down jumbo loan is $1,500,000. With a 10% down payment, the limit is raised to $2,500,000 and with a down payment of 15%, the maximum is $3,000,000. Other limits apply to borrowers with greater down payments.
Qualified buyers can elect to take out a single first lien or a combination of two loans, one at 80% of the sales price and one at 15%. This structure requires a down payment of 5%. With 10% down, another option is an 80-10-10 loan, where the first mortgage is at 80% of the value and the second lien at 10%. Both fixed and variable rate loans are available for both purchase and refinance transactions.
VA Jumbo Option
Another option for those seeking to finance a luxury home while coming to the table with as little down as possible is the VA Jumbo loan. VA loans don’t require a down payment but the loan amounts are limited to $548,250 when no down payment is made. Yet what many don’t know is that a VA loan can be used to finance a jumbo purchase when properly structured, just not with a zero down loan. Here’s how it works:
As we mentioned earlier, the VA loan guarantees 25% of the loss should a loan go into default. A high balance VA mortgage is one where 25% of the difference between the sales price and the $548,250 limit acts as a down payment. For example, if a home is listed at $600,000, the down payment required is 25% on just the amount over $548,250.
$600,000 – $548,250 = $115,650. 25% of $115,650 = $28,912 down payment. This represents a cash requirement from the veteran of about 6% of the sales price. Furthermore, the VA jumbo has no additional monthly mortgage insurance payment required.
Eligible borrowers for any VA loan include veterans, active duty, National Guard and Armed Forces Reserve members with six years of service and un-remarried spouses of veterans who have died while serving or as a result of a service-related injury.
For someone that is eligible for a VA loan while also shopping for a luxury home, it’s important to explore the VA Jumbo option. When properly eligible, it’s an excellent choice.
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