If you’re in the market for a $1 million-plus home and need financing, you’re in luck. “The good news is that the jumbo mortgage market has a plentiful supply,” said Guy Cecala, publisher of Inside Mortgage Finance. “We’re at record levels in terms of the number of lenders offering jumbo mortgages” — loans that exceed $417,000 in most parts of the country and $650,000 in high-cost housing markets.
And lenders are offering affordable interest rates on jumbo loans. In fact, the average rate on loans of more than $417,000 recently was lower than the average rate for traditional loans — 4.16 percent versus 4.23 percent, according to the Mortgage Bankers Association.
The best news: Lenders have made the requirements for getting jumbo loans more flexible. But that doesn’t mean getting a home loan for $1 million or more is easy for everyone. The factors that determine approval are “not loose by any stretch of the imagination,” Cecala said.
What It Takes to Get a Million-Dollar Mortgage
Conforming loans — mortgages that are less than $417,000 or $650,000 in certain states and high-cost markets — must meet guidelines set by Fannie Mae and Freddie Mac, which buy these loans from financial institutions. So requirements to get those loans are pretty standard from lender to lender.
However, jumbo loans exceed the size limits of what Fannie Mae and Freddie Mac are allowed by law to purchase. So these loans are held by the issuing lender. As a result, each lending institution will have its own guidelines, said Dan Green, publisher of TheMortgageReports.com.
But there are some general requirements borrows should expect to meet:
A Big Down Payment
The No. 1 factor that typically determines whether you’ll be approved for a loan is the size of your down payment, Cecala said. “If you’re a normal couple or family looking to buy a million-dollar house and have $25,000 to $50,000 saved up, you’re not going to do it,” he said.
Jumbo loans require a bigger down payment than conventional loans because of the increased risk, said Tony Thompson, regional manager for mortgage lender Guaranteed Rate. While you can get by with a down payment as little as 3 percent to 5 percent for a conventional loan, the minimum down payment for a jumbo mortgage is usually 15 percent, he said. Borrowers often are expected to put as much as 20 percent down, Cecala said.
However, some loan products allow smaller down payments. For example, Wells Fargo, the nation’s largest originator of jumbo loans, offers a jumbo mortgage that requires just a 10.01 percent down payment and doesn’t require private mortgage insurance or a second mortgage, said Eric Gotsch, a Wells Fargo Home Mortgage area sales manager for New York and Connecticut. There are other requirements, though.
It should come as no surprise that you need to be a high earner to get a mortgage for $1 million or more. Lenders look, in particular, at your debt-to-income ratio to make sure you’re monthly mortgage payment along with your other debts won’t be too much for you to handle. However, Green said a debt-to-income ratio that lenders might consider too high for conventional loans can be offset for jumbo loans by assets — specifically cash and other liquid investments.
To be approved for the Wells Fargo 10.01 percent down payment loan, for example, the borrower’s housing debt (monthly mortgage payments, taxes and insurance) shouldn’t exceed 30 percent of monthly income, Gotsch said. And total debt shouldn’t top 32 percent of monthly income for an adjustable-rate mortgage or 35 percent for a fixed-rate mortgage. For that particular Wells Fargo jumbo mortgage, borrowers also need to have 12 months’ of cash reserves to cover monthly housing payments, and half can be in retirement funds.
High Credit Score
“A typical jumbo borrower has a credit score north of 750,” Cecala said. Lenders will accept lower scores — but not much lower, especially if you’re only putting down 10 percent. Wells Fargo requires a credit score of 740 for its jumbo mortgage with a 10.01 percent down payment, Gotsch said.
After the mortgage crisis, lenders expected jumbo-loan borrowers to have a big down payment, high income and high credit score, Cecala said. Now, if you don’t meet one guideline but exceed another, compensating factors are considered, Gotsch said.
Plus, some lenders are willing to take more risk than others, Thompson said. “Keep in mind, that risk comes with a price and higher interest rate,” he said.
How to Get a Mortgage Over $1 Million
Large, national banks such as Wells Fargo, Chase and Bank of America dominate the jumbo loan market, Cecala said. But small, community banks, credit unions and national lenders such as Quicken Loans and Guaranteed Rate that aren’t tied to a particular bank also offer loans for $1 million or more. Cecala recommended getting mortgage quotes from each of these types of lenders.
You also can ask for recommendations from your real estate agent, who should know which lenders in your area will likely approve you for a jumbo mortgage.
Most importantly, make sure you discuss all the loan options available to you with potential lenders and weigh the benefits of each, Gotsch said. “Never underestimate the power of that information,” he said.
Written by Cameron Huddleston of GoBankingRates