By: Martin Santiago, Broker-Associate
WHAT’S a jumbo loan? A jumbo loan is any loan that exceeds the loan limits set by Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are nicknames for the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLM), respectively.
The median value of a home in California is more than double the median values of homes for the United States as a whole, even though the median income is only slightly higher.
Certain home loans are secured by government-sponsored entities if they conform to loan limits, but higher loan amounts are called jumbo loans and are not secured.
A few counties in California have higher jumbo loan limits than others due to the high cost of the average homes in certain areas. It’s harder to qualify for a “jumbo” loan because lenders generally can’t sell them in the secondary market and therefore must retain the risk. You’ll notice that most counties within California have a 2020 conforming loan limit of $510,400 for a single-family home. Higher-priced areas, like in the San Francisco Bay Area, have conventional limits of up to $765,600 due to higher home values.
Pre-coronavirus, the jumbo mortgage market relied on investors (often banks) to purchase the loans they originated. In the face of economic uncertainty and continuing high numbers of new unemployment claims – which means it’s trickier to predict who won’t default on a loan – that secondary market has largely dried up. This investor pullback means lenders now often must keep these mortgages in their own portfolio — and retain the risk.
While there are signs that lenders may be easing their requirements for these larger mortgages, the squeeze that started when the coronavirus pandemic hit the U.S. economy in March has continued, experts say. For consumers, it means more roadblocks to buying a pricey home or refinancing a big mortgage.
While it may be harder to qualify for a jumbo loan than it was just months ago regardless of where you apply, at least one major lender has eased its jumbo refinance requirements for existing customers after tightening them several months ago. If you hold assets – regardless of the amount – with Wells Fargo, you can pursue a jumbo refinance there. It also applies to current mortgage customers and those who have home equity line of credit through the bank. This is a change from a temporary requirement imposed in early April that customers have at least $250,000 in assets at Wells Fargo to be eligible for its jumbo refinancing program.
Underwriting criteria for jumbo loans are stricter because the loans are larger and riskier for lenders. Lenders may require your FICO score to be higher than 700, and sometimes as high as 720, to qualify for a jumbo loan. Lenders will also consider your debt-to-income ratio (DTI) to ensure you don’t become over-leveraged, though they may be more flexible if you have plentiful cash reserves. Some lenders have a hard cap of 45% DTI, however.
You’re more likely to be approved for a jumbo loan if you have ample cash in the bank. It’s not uncommon for lenders to ask jumbo loan borrowers to show they have enough cash reserves to cover one year of mortgage payments.
To prove your financial health, you’ll need extensive documentation, perhaps more than for a conforming loan. You should be prepared to hand over your full tax returns, W-2s and 1099s when applying, in addition to bank statements and information on any investment accounts.
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Martin Santiago is a broker associate at Compass Burlingame, a full-service residential brokerage firm. The information presented in this article is for general information only and is not, nor intended to be a formal legal advice nor the formation of a broker-client relationship. Call or email Martin at (415)850-7704; [email protected]; www.teammsquare.com.
