A jumbo loan, also referred to as a jumbo mortgage, is a loan that exceeds the dollar limit set by the Federal Housing Finance Agency. While a conventional mortgage gets guaranteed by Fannie and Freddie Mac, jumbo loans cannot.
Jumbo loans are given to people who want to buy luxury homes or properties in a highly competitive market. These types of loans come with unique tax implications and underwriting requirements. Since the housing market has continued to improve since the 2008 housing crisis, jumbo loans have become much more popular.
The amount that constitutes a jumbo loan varies from state to state and in some cases can even vary county to county. The FHFA sets the limits for conforming loans on an annual basis, but the limits change infrequently.
The conforming loan limit in Texas is now $647,200, recently updated from the 2021 change to $625,000, which was increased from $510,400 in 2020, and $484,100 in 2018. The amount that constitutes a jumbo loan varies from state to state and in some cases can even vary county to county. The FHFA sets the limits for conforming loans on an annual basis, but the limits change infrequently.
Homeowners looking for a house that is $685,000 or more, and wanting to only put a 20% down payment ($137,000), will most likely need a jumbo loan. Jumbo loans are riskier to lenders, so the borrower will face more strict requirements than those applying for a conventional mortgage. These loans are riskier to lenders because the mortgage does not get guaranteed by Fannie and Freddie Mac, and more obviously because the loan amount is higher.
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The minimum requirements have always been higher than those of traditional conventional mortgages, but since the housing crisis they have gotten even more strict. A very low debt-to-income ratio and a credit score of at least 700 is typically needed to qualify for a jumbo loan. A debt-to-income ratio of less than 43% and more preferably around 36% will be necessary to qualify for a jumbo loan. While a jumbo loan is a nonconforming loan, they still must obey the guidelines of what the Consumer Financial Protection Bureau considers a qualified mortgage. A qualified mortgage has standardized rules that must be obeyed such as the 43% DTI ratio rule.
Beyond your credit score and debt-to-income ratio, there will still be other requirements a borrower will need to meet. The borrower will need to prove that they have accessible cash to cover their monthly payments. The necessary income level and amount the borrower has in the bank will depend on the size of the jumbo loan, but potential borrowers must show 30 days of pay stubs and two years of W2 tax forms. People who are self-employed are subject to stricter income requirements. Self-employed people must show 60 days of current bank statements and two years of tax returns. The borrower must show liquid assets to qualify and six months of money in the bank equal to six months of mortgage payments. Applicants must show proper documentation on all other currently held loans and proof of ownership of non-liquid assets, such as real estate.