Buying a Higher-Priced Home? What Homebuyers Should Know About Jumbo Financing

Buying a higher-priced home can be exciting, but the mortgage process may look a little different when the amount you need to borrow exceeds the conforming loan limit.

That's when jumbo financing may come into the conversation.

After more than 25 years in mortgage lending, I've found that many buyers don't need to become experts on jumbo loans. But they do benefit from understanding how jumbo financing can differ from a conventional conforming mortgage—especially before they begin making offers.

Here are some of the things I encourage buyers to understand early in the process.

1. What Makes a Mortgage a Jumbo Loan?

A jumbo loan generally refers to a mortgage with a loan amount above the applicable conforming loan limit established by the Federal Housing Finance Agency (FHFA).

Those limits can change from year to year, and higher limits apply in certain designated high-cost areas.

That means whether a particular mortgage falls into the jumbo category can depend on several factors, including the loan amount, property type, location and current conforming loan limits.

Rather than assuming a higher-priced home automatically requires a jumbo loan, I prefer to look at the actual transaction.

2. Jumbo Doesn't Necessarily Mean an Enormous Down Payment

One misconception I hear is that buyers automatically need a very large down payment if they're using jumbo financing.

That's not always the case.

Down payment requirements can vary considerably among jumbo loan programs. The borrower's financial profile, loan amount, property type, occupancy and other factors can all affect the available options.

For some buyers, putting more money down makes sense. For others, preserving liquidity may be important.

The better question isn't simply, "What's the minimum down payment?"

It's also, "How should I structure this purchase based on my overall financial situation?"

3. Cash Reserves Can Be Important

With jumbo financing, lenders may pay particular attention to the assets a borrower will have remaining after closing.

These are often referred to as reserves.

Depending on the program, reserves may be expressed as a certain number of months of housing payments. Requirements can vary based on factors such as the loan amount, number of financed properties and overall borrower profile.

This is an important reason to talk with a lender before moving money between accounts or deciding exactly how much cash to use for the purchase.

4. Documentation May Receive a Closer Look

Higher loan amounts can mean more detailed underwriting.

A lender may carefully review income, employment, assets, liabilities, credit history and the source of funds being used in the transaction.

That doesn't necessarily mean the process has to be difficult.

It does mean organization helps.

If you receive bonuses, commissions, investment income or other forms of compensation beyond a straightforward salary, discussing those details early can help determine what documentation may be needed.

The same is true for business owners and self-employed borrowers.

5. Credit Matters, but the Entire Financial Picture Matters Too

Credit is an important component of mortgage qualification, and jumbo programs may have different credit requirements.

But credit score alone doesn't tell the whole story.

Underwriting may also consider debt-to-income ratios, assets, reserves, loan-to-value, income stability and the overall strength of the application.

That's why I don't recommend looking at one number and assuming it determines whether jumbo financing will work.

A complete review gives us a much better picture.

6. The Appraisal Can Be Especially Important

Every home is unique, but higher-priced properties can sometimes be more challenging to evaluate because there may be fewer directly comparable recent sales.

A waterfront home, custom property, luxury home or house with unusual features may not have an obvious comparison down the street.

The appraisal is intended to provide an independent opinion of the property's market value.

Depending on the loan program and transaction, additional appraisal requirements may apply.

Buyers should understand that the contract price and appraised value are separate things—particularly when purchasing a distinctive property.

7. Not Every Jumbo Loan Program Is the Same

This is one of the most important things I wish more buyers understood.

Jumbo mortgages aren't one universal loan product with one universal set of guidelines.

Different investors and lenders can have different requirements for loan amounts, down payments, reserves, credit, property types, income documentation and other factors.

That can matter significantly for a borrower whose financial situation doesn't fit neatly into one set of guidelines.

Sometimes the challenge isn't whether someone can qualify for a mortgage. It's finding the financing structure that appropriately fits the borrower and property.

8. Get the Financing Conversation Started Before You Make an Offer

This is probably my biggest recommendation.

If you're shopping in a price range where jumbo financing may be necessary, don't wait until you've found the house to start figuring out the mortgage.

Reviewing the financing early can help answer important questions:

• What price range is comfortable?

• How much should you put down?

• How much liquidity should you preserve?

• What documentation will underwriting need?

• Could the property itself create additional considerations?

• What loan structures are available?

It can also help you approach the home search with a clearer understanding of your financing.

Higher-Priced Homes Deserve Thoughtful Financing

A larger mortgage doesn't necessarily have to mean a more stressful mortgage process.

But it does make planning important.

When I'm working with someone considering a higher-priced home, I like to look beyond simply getting the loan approved. We can also discuss how the down payment, reserves, loan structure and overall financing fit together.

If you're considering purchasing a higher-priced home in Maryland or another area where I'm licensed, I'm happy to review the numbers with you before you make an offer.

Stuart Kiehne
President | Mortgage Loan Officer
Redwood Mortgage Services
NMLS #92008
www.Redwood-Mortgage.com

All loans subject to approval. Program availability, terms and qualification requirements may vary. Equal Housing Lender.