If you are looking for a large luxury home in the San Diego area, you may need to borrow more money than is allowed by government-backed loans. This means a jumbo loan could be required.
Jumbo loans allow borrowers to purchase property that may otherwise be out of reach, but qualifying for these large amounts requires a more detailed process.
If a jumbo loan is in your future, you should start preparing as soon as possible.
What is a Jumbo Loan?
As the name suggests, a jumbo loan is a particularly large loan that is above the “conforming limits” set by the FHA. Essentially, these loans are so large that government-backed companies are unable to purchase them in the secondary market, and the FHA is unable to provide insurance to lenders. Instead, banks hold them as part of their portfolio, which means they profit from the interest gained on the loan. However, they also assume the risk of default, and when it comes to jumbo loans, a default can be particularly costly to the bank.
Therefore, lenders are especially finicky when it comes to writing jumbo loans. They will have higher requirements for qualification, including more documentation, higher credit scores, and plenty of financial assets.
No loan should be approached casually, but when it comes to a jumbo loan, you need to prove you are an extremely reliable borrower.
How Much is a Jumbo Loan?
Whether or not you’ll need a jumbo loan depends largely on the location, as certain limits are set by the Federal Housing Administration and are based on the region’s housing market. San Diego County, for example, has an FHA-loan limit of $649,750 for single-family homes. That can certainly purchase a high-quality property, but it will leave many homes in our area off the list.
You can check the amounts in your area by searching the FHA Mortgage Limits page.
How to Prepare for a Jumbo Loan Purchase
Save (or Sell) for a Large Downpayment
Conventional or conforming loans are available with small down payments, usually as low as 3.5% for FHA loans and other products. There are even USDA and VA loans that can be secured with 0% down. However, you won’t have this option with a jumbo loan.
With a jumbo loan, you are likely going to need a down payment of 20% or more, which means you’ll need tens of thousands of dollars to secure the loan. To secure the loan, you’ll need to have a significant amount ready as a downpayment; if you don’t have it, you’ll either need to take a few months (or even a year or more) to save the cash or sell some assets. Jumbo loans with less than 20% down are possible, but they require even more scrutiny.
Prepare Your Income Documents
A jumbo loan will also require a significant review of your assets, which means you need to be prepared with plenty of documentation. To secure the loan, come to the lender’s office with full tax returns, W2s for as many years as you can, and 1099 forms as well. You should also have bank statements, information on investment accounts from which you draw, and any other documents that will display your income.
If you are self-employed, you’ll need W2 forms from at least two years. (For conventional loans, you may get by with only one year.)
Organized and Document All Your Assets
The more assets you have, the better, but the bank can’t just take your word for it. Prepare documents that verify your financial assets so the bank knows you have something on hand should the loan go to default. Having assets gives the bank greater reassurance that you are financially strong and responsible with money, but it also demonstrates that you have something of value they could claim if the loan goes unpaid. This is obviously rare, but the bank likes to have this assurance.
Reduce Your Debt-to-Income Ratio
You debt-to-income (DTI) ratio will be considered no matter what type of loan you are seeking, but if you want to secure a jumbo loan, you’re going to need as low a DTI as possible. To lower your DTI, you can either reduce your debt or raise your income; for most people, it’s more feasible to reduce debt.
Do your best to eliminate monthly payments on smaller items like credit cards or consumer credit lines. If your auto or student loans are nearly paid off, don’t let them sit around; use your cash to eliminate it. By reducing your current DTI, you increase your ability to take on the new debt created by a jumbo loan.
Check and Improve Your Credit Score
The credit score can be an important factor in your jumbo loan approval. Before visiting with a lender, check your credit report and score. You’ll need a relatively high score to qualify for a jumbo loan, which usually requires a rating at 700 or higher. It may be possible to secure a loan with less, but lenders rarely go below 680.
There are many steps you can take to improve your score, but one of the first things you should do is to check for inaccuracies or outdated information. If you find negative information that should not be on your report, you can have it removed by the credit agencies. Then continue with responsible debt payments and you should see an improvement in your score.
Get a Second Appraisal of the Home You Plan to Purchase
In many cases, the lender you work with will require a second appraisal on the home you wish to purchase. This can serve many purposes, but it essentially helps to verify that the home is in fact worth a specific amount. Essentially, if the bank is going to loan a large amount of money on the property, they want complete assurance that the property is worth the stated amount.
You can work with the lender and the seller for this step, but you will likely need to pay some or all of the cost for the appraisal.
Let Us Help with Your Jumbo Loan
Ready for a mortgage loan? San Diego Purchase Loans is here to help navigate the process of jumbo loan approval. With a dedication to service, we can increase your chances of approval for the right loan to fit your needs and budget.
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