One example of a non-qualified mortgage loan is a jumbo loan. It is called a “jumbo” loan because it surpasses the established conforming loan limits.
During the attempt to define what a conforming loan is, one goal was to establish a limit for the loanable amount. This limit was laid down by the Federal National Mortgage Association (FNMA or Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac).
In 2017, most conventional mortgage loan are very well within the 424,100 limit. There are a few exceptions for high cost areas such as those in Florida and California. These high cost areas have loan limits exceeding $636,150.
How Big is a Jumbo Loan?
Jumbo loans are, more often, more than half a million dollars. It is intended to finance luxury houses. Most of these properties are located in high cost areas where the real estate market competition is really steep.
Huge Money = Stringent Requirements
In conventional loans, there are standard credit requirements a borrower needs to meet in order to qualify for the loan. Since a jumbo loan is considered a nonconforming loan, it is not backed up by the government should a borrower file lawsuit against the lender. Also because of the huge amount of money involved, the lending institution is taking a greater risk on jumbo loans.
If you are trying to apply for this type of loan, expect to be under stringent underwriting, and tighter credit requirements.
Make sure you have a good credit standing with a score of at least 620. This is considered a fair credit score. But to increase your chances of getting approved on a jumbo loan you will need a score higher than 720.
In the years before the U.S. recession happened jumbo loans were approved with less paperwork required. Many can go away with this loan with very little income verification needed. Much has changed in the recent years.
When the ‘Qualified Mortgage’ loan was defined, it increased the need for standard documentation and verification. While jumbo loans can be considered Non-QMs, lenders are now asking borrowers to provide documentation as proof of their income.
Examples of these are Proofs of income and liquid assets, and proofs of ownership for non-liquid assets.
With a stellar credit, you may find a one that only requires a 10 percent down payment. This may mean lesser money to put upfront. However, a small down payment may increase your monthly interest rate or affect your loan terms.
Make sure you assess your financial situation and you read the loan agreement first before you decide to pay cash up front.
Not all jumbo loans are non-QM. Those that fall under the qualified mortgage bracket may have standard DTI requirements. Your DTI cannot exceed 43% for qualified jumbo loans.
If your DTI is way over that cap, a non-QM jumbo loan is what you need. It does not mean though that the lender will not perform a verification if you can afford the monthly payables. There will still be a need for verification.
One big factor that comes into play is income. Because of the huge size of the loanable amount, the income is where lenders find security. Your income and other reserves must be able to cover this big debt. For the self-employed, you may need to provide tax returns and bank statements. For traditional borrowers, pay stubs and W2 be asked from you.