Any conventional loan made in an amount above the conforming Fannie Mae / Freddie Mac maximum loan limits is a JUMBO loan. Underwriting is essentially customized by the lender that is offering the jumbo loan product. Most follow Fannie Mae / Freddie Mac underwriting guidelines with a few additional “ingredients”of their own to suit their senior management.
There are endless ideas that formulate new jumbo loan programs, some are hot, some not so. Suffice to say that the bigger the loan, the higher the required down payment is likely to be. If you are a US Veteran with VA Loan entitlement, go back and look at the VA section where I give an example of a Veteran getting a VA Jumbo loan with only 4% down payment (this is extremely generous and beneficial if you qualify). This is a very little known leverage strategy that I have used successfully for some Veteran clients, you just can’t beat it!
There are many differing Jumbo loans and because they are not intended to be sold to Fannie Mae / Freddie Mac, they may have any number of unusual terms and conditions. Things like balloon payments or pre-payment penalties that can require additional fees and/or risks. It should go without saying, but I’ll say it anyway, you should read the details of your loan parameters at application, and if you have any questions at all…ASK THE QUESTIONS!
Underwriting DTI (debt-to-income) ratios, liquidity, credit and LTV (loan-to-value) ratios should be discussed with the lender before you make application and before you agree to pay for credit reports and appraisals. This is more important than ever before because appraisals are not as “portable” from one lender to another as they were until 2009. These fees are not inconsequential as jumbo appraisals can cost up to one thousand dollars and more depending on size of the home and the price tag that the controlling AMC (appraisal management company) pins on their work
Once you’ve spent the money for an appraisal, it’s spent, even if you later find that the loan product will not work or is undesirable to you and you decide to go elsewhere for your mortgage loan. I would personally suggest that if you’re feeling like a drunk sailor with your paycheck, use that cash to take a couple of your friends to a Karaoke bar and have fun, at least one of you will be thrilled!
Because JUMBO loans are underwritten to loan product specifications, it would be wise to follow the Conventional Loan Qualifying Ratio Guidelines (earlier in this Guide) as there are no standards between the myriad of jumbo lenders. Most jumbo lenders adhere rather closely to the Fannie Mae guidelines.
As in the other loan products, jumbo lenders will not count insignificant debts in the ratio analysis if there are 8 or fewer payments left. Major debts, like car payments, are treated with more caution, as it is about as American as apple pie to replace your current car when the debt is paid off. (and, if I might suggest, look at some of the new American cars first, profits remain and are spent in our country).