Jumbo loans are becoming a popular option in areas of California where median home prices are high. When median home prices soar, loan limits on conventional and FHA loans are often not high enough to cover the cost.
In today's housing economy, many would be California home owners are turning to jumbo loans to bridge the gap.
What is a jumbo loan?
A jumbo loan (also referred to as a jumbo mortgage) is a type of non-conforming loan that has a higher loan limit than a traditional conforming loan that follows Freddie Mac and Fannie Mae guidelines.
In California, the conforming loan limit for 2018 is $453,100. That means, if you need to finance even one more dollar than that, you'll have to use a jumbo loan to do it.
Jumbo loans start at $453,101, and restrict their limit depending on the lender.
Jumbo loan requirements
As you might imagine, a loan that
On the flip side, the credit requirements are lower than they are for conventional loans, the debt to income ratios are higher and 3.5% down payment is often enough to get you into a home.
Here’s a list of requirements with a more detailed explanation of each below:
500-579 credit score with at least 10% down
580+ credit score with at least 3.5% down
Less than 55% debt-to-income ratio*
Intent to occupy the home as primary residence
2 years verifiable employment history
Appraised value meets or exceeds loan amount
Home meets or exceeds FHA quality standards
*this varies and may be higher or lower depending on the circumstances.
Unlike some government backed loans (such as a VA and USDA loans), FHA loans do require some down payment. There are two minimum thresholds required for down payments, and your minimum will depend on your credit scores.
3.5% minimum down payment
You can meet the down payment requirement for a FHA loan with as little as 3% down, but only if your median credit score is 580 or higher.
10% minimum down payment
If you have a median credit score in ranging from 500-579, you may qualify to borrow with an FHA loan, but you’ll be required to put at least 10% down, instead of the minimum 3.5%.
What if your score is below 580?
In this scenario, it would be best to talk with a mortgage advisor who could help you decide whether it made to go ahead and use the 10% down toward the house, or hold off and use the money to pay existing debts and improve your credit score enough to qualify for a conventional or better FHA loan.
What if your score is way above 580?
With an FHA loan, you won’t be rewarded with a significantly lower interest rate for having an outstanding credit score, like you would with a conventional loan. You will see a better rate just not a massively better rate. With a higher credit score you will be able to borrower more and the automated underwriting will look more favorably on high debt to income ratios with a strong credit score.
The FHA offers credit evaluation guidelines to lenders, who are ultimately the ones who will decide if they will fully approve your loan. These guidelines encourage decision makers to evaluate a credit history based on a pattern of behavior, rather than a few isolated missteps, and probe for explanations when they see questionable or risky activity on a credit report.
An old late payment from two years ago may not require an explanation, but if there are judgements or other negative marks on the report, they will likely investigate further, and ask for a written account of what caused the problem.
What if you have NO credit history at all?
Lenders issuing FHA loans are prohibited from turning down an application for lack of sufficient credit history. This makes FHA loans great for first time buyers, who may not have a long history of borrowing.
All other areas of the application still need to be up to par, but lack of credit history alone cannot disqualify you from borrowing. There will be significant hoops to jump through if you don’t have a credit score but it is doable.
Items that look good in your credit history:
Regular monthly payments on credit card, student loans, and other mortgages
Payments made on time
Payments made above the minimum amount
A moderate number of accounts
Old accounts that are well established
No foreclosures or bankruptcies
Accounts that are below the maximum credit limit
Items that don’t look so hot in your credit history:
Patterns of late payment
Lots of new accounts
Foreclosures & short sales
No activity at all
In the absence of a credit history adequate to show a pattern of payment behavior, underwriters evaluating your loan application may look to other means of determining whether you are a good risk or a bad one. Utility bills, phone bills, and insurance payments are examples of places a lender might find patterns of behavior around paying bills on time.
Can you get an FHA loan after a bankruptcy, foreclosure, or short sale?
Having had a bankruptcy or foreclosure in the past does not automatically exclude you from getting an FHA loan.
Chapter 7 bankruptcy - 2 years (1 year for special circumstances)
Chapter 13 bankruptcy - 1 year (after entering repayment plan and with judge’s approval)
Foreclosure - 3 years (can be shorter for special circumstances)
Short Sale - 3 years
What if you don’t know what your credit looks like!?
It’s easy to find out what your credit looks like, even if you aren’t ready to buy a house. It’s good to know as early as possible, in case there are blemishes or incorrect information that needs to be addressed.
You are entitled to a free copy of your own credit each year from each of the credit reporting agencies, and can easily request them by contacting TransUnion, Equifax, and Experian directly.
Debt-to-income ratio (DTI) is a measurement of what you owe on current debt obligations in contrast to what you make. The ratio can vary, but is roughly 50% for FHA loans, though it often times goes up to 55% or even 56.99% with good credit..
Employment history (minimum 2 years)
Employment requirements for an FHA loan are similar to conventional loans, in that 2 years of verifiable income in the same industry is preferred. That doesn’t mean you had to be at the same job, necessarily, just that it was the same industry, and there aren’t periods of unemployment during those years.
Job change and changes in type of work won’t necessarily disqualify you, but there will be additional paperwork required to satisfy the underwriters.
As with most rules, there are exceptions.
FHA loan applicants are still eligible without satisfactory verifiable employment history in a few select circumstances:
Time away from work for medical reasons or injury
Continuing education in your chosen profession
FHA Loan Property Requirements
The property you intend to buy with an FHA loan must also meet certain criteria to be eligible for purchase with an FHA loan. There are both type of property and use considerations, as well as safety and quality standards the home must live up to.
Eligible Property Uses
FHA loans can be used to buy a variety of property types, including multi-unit properties up to and including 4-unit properties, provided you occupy one of the units as your primary residence.
As part of your FHA loan approval process, the house in question will have to pass an FHA specific appraisal process. This appraisal helps provide proof to the potential lender that the home is at least as valuable as the loan amount they would lend you, and is also that it meets certain health and safety standards set by the FHA.
This applies only to FHA loans used to purchase homes. FHA streamline refinance transactions do not require a home appraisal.
Who pays for an FHA appraisal and what does it cost?
Typically the buyer pays for an FHA appraisal, which is carried out by an independent appraiser, who visits the potential property, and cost varies depending on the size of the house, property type, and other characteristics of the home and property.
What determines the outcome of an FHA appraisal?
The home being appraised is measured against other comparable homes of similar size, location, and age, to determine an appraisal value.
Items used to determine the value include:
Home’s exterior and interior building materials
Age of the home
Style of the home
Neighborhood the home is in
Number of bedrooms and bathrooms
Age and condition of the home
Aesthetic quality of the home and its surroundings
And even which utilities and services are available there
FHA Property Standards During Appraisal
Unlike conventional loans, which can be approved for dilapidated and rundown buildings in need of repair, FHA loans will only be approved for homes that meet a certain standard for living, regardless of the appraised value.
These standards HUD (Housing and Urban Development) minimum property standards, and are mainly concerned with health and safety, as well as general structural considerations.
Required appraisal items for FHA loans include:
Complete and marketable home condition
Heating system in working order
Absence of any peeling lead based paint
No electrical wiring is exposed
Undamaged exterior walls
No obvious hazards in the home
Construction is of adequate quality
Property has properly functioning drainage
Roof is in good condition, and not in need of repair
Access to the home is public and safe to use
Water to the home is safe to drink
Natural ventilation exists in any crawl spaces
Readily available utilities include gas, electricity, and water
How to apply for an FHA loan
The process of applying for an FHA loan is is the same as the process for any other loan. It starts with a conversation with your mortgage advisor to pre-qualify you, and decide whether or not an FHA loan is the best choice for your particular needs.
After a conversation with your mortgage advisor to determine your best potential outcome, an application is filled out, and a pre-approval is issued, along with an official pre-approval letter stating the amount you are pre-approved to borrow, and you can start putting offers on homes.
If you think you might be interested in an FHA loan, feel free to call one of our mortgage advisors, who can help steer you in the direction that best meets the future financial needs of you and your family, as you begin the journey of buying a home.
Empower yourself with knowledge to make smart decisions. These helpful tools and resources will help you enjoy the process of getting a home loan, and feel confident in your financing choices.
Point Equity Residential Lending, NMLS ID 1404205; www.NMLSConsumerAccess.org. Main Office located at 925 Highland Pointe Dr. Suite 330, Roseville, CA 95678. Telephone Number: 916-248-4620. Equal Housing Lender. Licensed in CA by Dept. of Business Oversight under the CA Finance Lenders Law, 56023, and the CA Dept. of Real Estate under the CA Real Estate Law, 01987090. Information, rates, and programs are subject to change without notice and may not be available in all states. This is not an offer to enter into an agreement. All products are subject to credit and property approval.
All information contained herein is for informational purposes only and, while every effort has been made to ensure accuracy, no guarantee is expressed or implied. Any programs shown do not demonstrate all options or pricing structures. Rates, terms, programs, and underwriting policies subject to change without notice. This is not an offer to extend credit or a commitment to lend. All loans subject to underwriting approval. Some products may not be available in all states and restrictions apply. Equal Housing Opportunity.