Finding the Best Jumbo Loans
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A) What Are Jumbo Loans?These are not the type of loans that were prevalent in the pre-2008 financial crisis, and no longer are the days in which loan applicants can simply state their income on a loan application with virtually no due diligence conducted by the lender. After the 2008 financial crisis, the sweeping provisions of Dodd-Frank changed the industry substantially, at least in the owner-occupied residential context. Since 2010 Dodd-Frank has required lenders to document a residential borrower’s ability to repay the loan. Jumbo lenders still want to ensure borrowers can repay their mortgages, they typically require a lower debt to income ratio (DTI) to verify income. Jumbo lenders also require a higher down payment and increased reserve requirements. Jumbo loans typically require an increased credit score of 700 or more. Valor Lending Group features an incredible array of jumbo loans that will allow higher than the typical jumbo loan to value and debt to income ratios as well as lower credit scores and reduced reserves requirements.
B) Why Use Jumbo Loans?Traditional mortgage lenders require tax returns, W-2s, and paycheck stubs in order to determine monthly income. For salaried and hourly borrowers, the lenders look at gross income for qualifying purposes. But for self-employed borrowers, traditional mortgage lenders look at net income, the adjusted gross income showing on tax returns. The qualifying income is viewed in conjunction with all debts, and a debt-to-income (“DTI”) ratio is calculated. Traditional mortgage lenders would be required to have a DTI of no more that 35%, however, at Valor Lending Group our funding sources typically allow up to 50% DTI and a lower credit score and down payment requirement.
C) What Does A Jumbo Loan Look Like?
1) Self-Employed RequirementJumbo lenders will typically require a borrower to be self-employed for a minimum of two years. This is verified either through appropriate professional licenses, business licenses, or sometimes a letter from a tax preparer. Additionally, 2 years of business income tax returns are required for business owners to verify no decline of business income year over year. Jumbo lenders may also consider the W2 earnings of a spouse or co-borrower in terms of qualifying income.
2) Employment RequirementOnce again, jumbo lenders review 2 years of consecutive tax returns, W2’s, 1099’s, and pay stubs to determine qualifying income. Additional types of income include social security, pensions, retirement monthly distributions, and annuities, etc. Jumbo lenders will look to obtain your most recent 30 days paystubs and a certified employment offer letter stating the gross salary, start date and benefits (for those who are starting a new job in the same industry).
(a) Qualifying Hourly employee income
For hourly W2 employees, the lender will use your hourly rate of pay, averaged with your most recent 2 years tax return income. Additionally, the lender will qualify a two year average of your commission, bonus, vacation pay and sick pay etc. (if applicable).
(b) Qualifying Salary employee income
The lender will always count 100% of your current salary and does not use a two-year average as your pay is guaranteed year to year per your employment contract. To the contrary the lender will qualify a two-year average of your commission, bonus, vacation pay and sick pay etc. (if applicable).
3) Income, Debts & CreditAfter determining total qualifying income, the next step is to total up all debts, including the new mortgage payment, property tax, insurance and homeowner’s association (HOA). All monthly debts are viewed in conjunction with total monthly qualifying income, and most lenders will allow up to 35% debt-to-income (“DTI”) ratio when qualifying borrowers for a Jumbo loan. However, Valor Lending Group has funding sources that will allow up to 50% DTI on a jumbo loan. Most jumbo lenders require a minimum 700 credit score, although each has its own guidelines. Credit requirements for jumbo loans are more stringent than the traditional lenders.
4) Down Payment, Rates & CostsThe minimum down payment on a jumbo loan is usually 20%. A handful will allow as low as 10%, although 10% down is becoming increasingly rare. These loans will have a noticeably higher interest rates due to a higher default risk factor, and lack of investors buying 10% down jumbo mortgage-backed securities on the secondary market. Additionally, the 10% down jumbos will require higher credit scores and liquid reserves (12 Months) and a lower debt to income ratio (DTI). Larger down payments, say the 20% or higher, do often allow for a better rate and term. Gift funds from close relatives are usually allowed, to be applied towards the down payment. Although, many jumbo lenders may not allow gift funds for liquid reserves. Rates for jumbo loans are generally higher than traditional conforming loans (based on increased perceived risk to jumbo lenders), but all other typical loans fees are similar, such as origination points, broker and lender fees, appraisals, title and escrow, etc.
5) Owner Occupied vs. Non-Owner Occupied
(a) Owner Occupied
Owner occupied jumbo loans, including second homes, offer higher leverage up to 90% loan to value (LTV) as well as lower interest rates, and lower credit score requirement. This loan can be vested in your personal name or family revocable trust.
(b) Non-Owner Occupied
Non-owner-occupied jumbo loans will require a minimum of 20% down, higher interest rate and higher credit score requirements. This loan can be vested in your personal name or family trust, and in addition can be vested in a LLC or corporation etc.
6) Jumbo Bank Statement LoansIt is also possible to get a “jumbo bank statement loan.” These are simply bank statement loans above a certain dollar amount, which is higher or lower depending on the county. For example, California Jumbo Loans start above minimum loan amounts ranging from $548,250 (Riverside County), to $822,375 (Los Angeles County) for single unit properties. (These amounts are higher for 2, 3, and 4-Unit properties). Depending on the jumbo loan lender, bank statement loans can go up to $10 million or more.
7) Jumbo Loans 2-4 UnitsJumbo loans can be used for 1–4-unit residential properties. Jumbo loans for 2-4 units allow for higher loan limits depending on the number of units. For instance, in 2021, San Diego County will allow loan amounts for 2 units up to $964,300, 3 units up to $1,165,600 and 4 units up to $1,448,600. As you increase the number of units; you will see a decrease in the loan to value. The highest loan to value is offered on a 1-unit property (SFR, Condo or Townhome).
D) What Jumbo Loans Are NOT
1) Jumbo Loans Are NOT “Commercial Loans”Once again, jumbo loans require income verification. Depending on if you are self-employed or employed will determine your qualifying income.
2) Jumbo Loans Are NOT “Government Loans”Jumbo loans are sold in the secondary mortgage market the same as traditional conforming loans. They are NOT backed, insured or guaranteed by any government agency such as FHA and USDA loans, except for the VA jumbo loan, which are offered up to $1.5 million loan amount by a few select funding sources.
E) Finding The Best Jumbo LendersMany jumbo lenders do not have a retail channel, meaning they will only fund loans through a broker. The best brokers spend many hours scouring thousands of loan programs to find the best rate and terms for their clients. It is in the broker’s best interest to find the lowest rate and most favorable terms available in order to best serve their clients. If you are considering purchasing or refinancing a property using a jumbo loan, it is best to make sure you maintain your tax records, W2’s, 1099’s and paystubs. Additionally, keep organized bank statements, retirement statements and savings for a down payment. It is also a good idea to speak with a broker far in advance of your desired purchase date.
F) Advantages and Disadvantages of Jumbo Loans
1) Pros of Jumbo Loans
- Higher Loan Amounts
- Luxury Homes purchase (better schools, lower crime rates, larger homes)
- No Mortgage Insurance (for some lenders)
2) Cons of Bank Statement Loans
- Higher Interest Rates
- Lower Leverage
- Lower debt to income ratio, typically at 35% DTI
- Higher reserve requirements
- More stringent underwriting guidelines