Did you know mortgage loans have limits to the amount you can borrow?
Loan limits on the most common home loans may not meet what you need in the current market.
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If this happens to you, you may need to apply for a non-conforming loan, such as a jumbo loan, to afford the home you want.
Let’s take a look at current loan limits, how to know when you might need a jumbo loan and how to get approved for a larger loan amount.
What are mortgage loan limits?
The most popular home loans on the market, including conventional loans and FHA loans, are known as conforming loans.
Conforming loans cannot exceed the maximum loan amount established by the government.
According to the Consumer Financial Protection Bureau (CFPB), the maximum loan amount for conforming conventional loans in most counties throughout the country is $647,200. In high-cost counties, the limit may stretch to $970,800.
Non-conforming loans are not as standardized, and the limits will vary by lender.
If you’re in an area with high home prices or if you’re able to afford a more expensive home, you’ll need a loan that can accommodate these needs.
As mentioned, one example of a non-conforming loan with higher loan amounts is a jumbo loan.
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What is a jumbo loan?
Jumbo loans are used to purchase homes that exceed the loan limits set for conforming loans.
Unlike conforming loans, non-conforming jumbo mortgages are not guaranteed by the federal-backed institutions Fannie Mae and Freddie Mac.
While non-conforming loans allow borrowers toacquire a larger amount, it also means that these loans are considered more of a risk for lenders and involve stricter requirements.
For the right borrower, the stricter credit and debt requirements won’t be an issue, because the higher loan amount is worth the extra steps.
If you’re not sure whether you can meet the requirements for a larger loan amount, we have some tips to help you get in the best financial shape possible.
What can you do if you need approval for a larger loan amount?
If you’re considering a jumbo loan, it’s helpful to take a look at your current financial standing and make sure you’re in the best shape possible.
Improving your credit score and paying down debt can help you qualify for a larger loan amount and a better interest rate.
While interest rates for jumbo loans are competitive with conventional rates, having a higher credit score helps borrowers qualify for the best rate possible with any type of loan.
Let’s take a look at how you can fine-tune your finances to get approved for a jumbo loan.
Pay off credit cards or other loans
Paying off your credit card debt or other loan debt helps with both your debt-to-income ratio (DTI) and your credit score.
Your DTI compares your gross monthly income to your monthly debt payments. It is presented as a percentage.
For example, if your gross monthly income is $8,000 and your monthly debt equals $3,000, your DTI is 38%.
A 43% DTI is considered the highest percentage many lenders allow to qualify for a mortgage; but if you’re looking for a jumbo loan, you should aim for a DTI of 36% or less.
In the example we provided, the borrower can achieve a DTI of 35% by lowering their monthly debt payments to $2,800 a month.
Calculate your DTI to determine how much monthly debt you should eliminate prior to applying for a jumbo loan.
Keep in mind that you’re welcome to apply for pre-approval at any time.
Pre-approval can give you an idea of where you are financially by revealing what you qualify for, so you can work to achieve your goals.
Boost your credit score
An excellent credit score will grant you access to better interest rates and help you qualify for a jumbo loan.
Conforming loans, such as FHA loans, often allow credit scores as low as 580. You’ll find that lenders who offer jumbo loans will want to see a credit score of at least 700, but the higher the better.
You can check your credit report for free once a year. Download your report to evaluate your credit history and see what’s affecting your score the most.
The best way to boost your score is to pay down your credit card balances and make sure you’re making all your monthly payments on time.
Increase your down payment amount
With most mortgages, a down payment amount of at least 20% is ideal.
Down payments of 20% eliminate the need to pay private mortgage insurance (PMI).
When it comes to jumbo loans, a down payment amount of 20% or higher is helpful because it will decrease your overall mortgage balance and prove to lenders that you have the funds to afford this type of loan.
Consider adding a co-borrower
Two incomes can help you qualify more easily for a jumbo loan.
You and your spouse, domestic partner, family member or close friend can both apply for a jumbo loan, thereby increasing your odds of approval.
A co-borrower’s name will also be on the title and will be equally responsible for repaying the mortgage loan.
Apply for pre-approval to determine how much home you can afford
The first step in the homebuying process is to apply for pre-approval with a trusted mortgage lender.
Not all lenders offer jumbo loans, but Compass Mortgage does. With our team, you can expect a simple, personalized loan process with lenders who will treat you like family.
We promise to be your partner and advocate throughout every step of the loan process, to ensure you get the most affordable loan for your home.
Apply now for pre-approval or, better yet, ask about Get Committed®, a unique program of Compass Mortgage which offers you the opportunity to receive a fully underwritten loan commitment that locks in your interest rate before you even find the property you want to buy.
A loan commitment essentially has the power of a cash offer, showing the seller you’re fully approved financially and that your deal isn’t likely to fall through.
We look forward to helping you finance the home of your dreams!
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