In Houston, a Jumbo loan is a mortgage amount that exceeds the conforming limits. The conforming loan limit in Harris County and all of Texas is currently $484,350. Jumbo loans have much of the same qualifying guidelines as other conventional mortgages. Jumbo loans require verification of income, require higher credit scores and often require a higher down payment.
There should also be evidence of enough cash to close on the transaction including the down payment, closing costs, and cash reserves. This evidence is provided by way of bank statements. Those who are self-employed typically don’t pay themselves on the same date each month, such as the 1st and 15th like an employee might. Instead, income is received at various times when services are performed.
One of the first considerations for qualifying someone who is self-employed is determining how long that individual has been in business. Lender guidelines require there be at least two years of self-employment. To verify this history the applicant will be asked to provide the two most recent years of federal income tax returns for both the business as well as personal filing.
There can be exceptions to this two-year rule when the individual is a licensed professional who has an extended work history while staying in the same line of work. A common example is a doctor who works at a hospital in Houston for a few years as an employee and then starts up a brand new practice.
When reviewing tax returns, lenders calculate qualifying income. When someone is employed and receives a regular paycheck the gross monthly income, as well as year-to-date income, is printed upon the paycheck stub. Those who are self-employed will have a two-year history of income along with a current year-to-date profit and loss statement averaged together. However, this is the difference between year one and year two income. Jumbo loan guidelines like to see a consistent year-over-year amount of revenue and ideally increasing from one year to the next.
What can cause some concern if year-over-year income is showing a noticeable decrease? A slight decrease in income is fine but anything beyond 10 percent can cause an underwriter to question the individual why the income has fallen. Is the business still viable? Can the individual properly run a business? Those who are self-employed must show not only can they produce consistent income but also run the day to day responsibilities of keeping the business running well into the future.
The standard view is the business should be around three years from now, but of course, making this determination is subjective. With a verified two year history of stable or increasing income, it’s reasonable to assume the individual knows how to run a business and has overcome the challenges often faced in the startup phase.
These rules also apply to someone who may be operating a side business outside of working for an employer. For lenders to count this type of supplemental income, there must also be a two-year history documented. Someone who simply takes up a part-time, seasonal job might find it difficult to have that income counted if the income is inconsistent.
Further, many who have a bonus or commission income that exceeds 25 percent of their total monthly income can be treated as self-employed, even if they work for an employer. This is common for individuals who get paid a regular salary plus a commission or bonus. For someone in sales this can often be the case where a salary is issued but so too is income from a commission. Lenders who use commission income to help qualify for a jumbo loan must show the additional income is available for regular debt service.
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Commissions that are paid monthly or even quarterly can fall into that category. Annual commissions, those that are paid just once per year, most likely will not be used. Someone getting a Holiday Bonus in December might not have any of that bonus left when July rolls around. Bonus income, performance bonus, for example, should also be verified as having a history and available for debt service.
Self-employed borrowers applying for a jumbo loan will also be expected to have a higher credit score compared to someone applying for a conforming loan. Qualifying credit scores typically range from 680 to 740 depending on the down payment amount. Buyers can read about all the low down payment financing guidelines on the Jumbo Purchase Page. 10% and 5% down payment solutions are available to self-employed borrowers.
Also, keep in mind that banks and lenders who issue jumbo loans often write their own guidelines and don’t have to follow someone else’s rules. Conforming loans, for example, follow standard guidelines set by Fannie Mae or Freddie Mac. With jumbo loans, there can be slight variances from one mortgage company to the next. This is especially true when it comes to the down payment and credit standards.
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