If youre planning on purchasing a new home, financing is one of the most important things you need to consider. Its not just about the lender you choose, but also what type of loan you use. For higher-priced homes, this usually means getting a jumbo loan.
Jumbo loans are mortgages that fall above conforming loan limits and typically have higher qualification standards. These loans are not backed by Fannie Mae and Freddie Mac so they’re considered more of a risk to a lender. If you are considering this type of mortgage, its important to know what your lender will review before approving your loan. That includes debt-to-income (DTI) and loan-to-value (LTV) ratios.
Getting approved for a jumbo loan usually requires meeting stricter debt to income ratio guidelines than a conventional mortgage. While it can be challenging, understanding what lenders look for and taking steps to improve your DTI can help you qualify.
What is a Jumbo Loan?
A jumbo loan is a mortgage that exceeds the lending limits set by Fannie Mae and Freddie Mac for a conforming loan. These limits vary by county but typically max out around $650,000.
Jumbo loans are considered riskier for lenders because they are not able to sell them to Fannie Mae or Freddie Mac. Because of this increased risk, jumbo loans come with stricter approval guidelines. This includes needing a lower debt-to-income ratio.
Why Lenders Care About Your DTI
Your debt-to-income ratio compares your total monthly debt payments to your gross monthly income. It gives lenders an idea of your ability to manage monthly payments.
A lower DTI indicates you will have more available income to dedicate toward your mortgage payment each month For this reason, lenders usually require a DTI of 43% or less for a conventional mortgage
With a jumbo loan, having a lower DTI is even more important. Many lenders look for a DTI of 36% or less. Some may approve DTIs up to 43%, but this usually requires an excellent credit score or significant assets.
Calculating Your Debt-to-Income Ratio
Follow these steps to determine your DTI:
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Document Your Monthly Income Add up your gross (pre-tax) monthly income from all sources This includes salary, bonuses, side jobs, rental income, etc. Use your year-to-date pay stubs to accurately calculate this number
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List Monthly Debt Payments: Document all monthly debt payments like credit cards, auto loans, student loans, existing mortgages, child support, etc. Do not include utilities or other bills not on your credit report.
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Divide Total Debt by Total Income: Take your total monthly debt payment and divide it by your gross monthly income. This will give you your DTI as a percentage.
For example, if your total monthly debt is $2,000 and your gross monthly income is $5,000, your DTI is 40% ($2,000/$5,000). To qualify for most jumbo loans, you’ll want your DTI at 36% or lower.
Tips for Improving Your DTI Ratio
If your DTI is too high, take these steps to improve it before applying for a jumbo mortgage:
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Pay down existing debts: Focus on paying down credit card and loan balances to lower your monthly payments. Even an extra $200-300/month can make a difference.
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Refinance existing loans: Consider refinancing high-interest loans like auto loans to reduce monthly payments. This can instantly improve your DTI.
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Consolidate debts: Debt consolidation combines multiple debts into one new loan with a lower monthly payment. This can instantly drop your DTI. But time it right, as new loans can also negatively impact DTI.
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Increase income: Take on a side job or freelance work to increase your monthly gross income, allowing you to qualify for more debt. Added income has a big effect on lowering DTI.
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Remove co-borrowers: Consider applying for the loan under only the borrower with the best DTI. Removing applicants with high debt can improve your chances.
With some effort, you can get your DTI low enough to get approved for a jumbo mortgage. Work on improving this ratio at least 6 months before applying.
Factors Besides DTI Impacting Qualification
While DTI is important, lenders also look at other factors when approving jumbo loans. These include:
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Credit score: Most lenders require at least a 680 FICO score. Excellent credit can sometimes offset a higher DTI.
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Loan-to-value ratio: Your down payment percentage can influence approval odds. 20% down or more improves your chances.
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Assets and reserves: Having 2 years’ worth of mortgage payments in liquid reserves boosts your qualifications.
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Property type: Primary residences are easiest to qualify for. Second homes or investment properties can be harder.
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Income: Multiple years of stable income from the same job or business is ideal. Bonuses and commissions require extra scrutiny.
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Employment: Being in the same line of work for 2+ years with no gaps is best. Frequent job changes or self-employment make approval harder.
Looking at the full picture allows lenders to feel more comfortable approving a jumbo mortgage application, even with a less than perfect DTI.
Shop Multiple Lenders
Each lender may use slightly different formulas and standards when calculating DTI. Because of this, it can be helpful to apply with multiple lenders when trying to qualify with a higher DTI.
Along with big banks, consider credit unions and smaller lenders. Niche lenders that specialize in jumbo loans, like Rocket Mortgage, can offer more flexible options.
Working with an experienced loan officer or mortgage broker can also help. They may know of lenders willing to approve higher DTIs. Just be sure to complete all applications within a 30 day period to minimize credit report inquiries.
When Additional Down Payment Can Offset DTI
Because jumbo loans come with more risk, some lenders may be willing to approve a higher DTI with a larger down payment. This added equity can help offset the risk posed by the higher debt obligations.
Many jumbos require 20% down already. But putting down an additional 10-15% could lead to an approval with a DTI around 40%. This added equity makes the lender feel more comfortable with the ability to foreclose and recoup their investment if needed.
If you have the funds available, increasing your down payment can be one way to get a jumbo loan approval with less than perfect DTI numbers.
Alternative Options if You Can’t Get Approved
If you’ve taken steps to improve your DTI but still can’t qualify for a jumbo loan, here are some options to consider:
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Explore FHA loans: FHA loans are government insured and more lenient with DTI, with many lenders allowing up to 55%. Loan limits in expensive areas can reach up to $970,800.
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Look for co-signers: Adding a co-signer with excellent credit and DTI can improve your chances for approval. Their income and debts influence the numbers.
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Wait and reapply: Give yourself 6 more months to improve your DTI and credit, then reapply with multiple lenders. Slow and steady improvements over time could eventually lead to an approval.
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Lower purchase price: Opt for a less expensive home that qualifies for a conforming loan. This comes with easier approval guidelines.
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Make a larger down payment: Putting down 40% or more on a jumbo loan can lead to an approval despite DTI challenges. Not ideal but can work if you have the funds.
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Appeal the denial: Write a letter explaining any circumstances impacting your DTI and making your case for approval. In some cases, this can lead to a reconsidered decision.
With persistence and a prudent financial strategy, you can hopefully get your DTI where it needs to be. This will allow you to qualify for a jumbo loan and buy the luxury property you deserve. Don’t get discouraged by initial denials. Stay focused on incrementally bettering your DTI over time.
Frequently Asked Questions
What is the lowest DTI a lender will approve for a jumbo loan?
Most lenders like to see your DTI at 36% or lower when approving a jumbo mortgage. Some may allow DTIs up to 43% with strong compensating factors like excellent credit and a lower LTV.
How can I calculate my estimated DTI for a new mortgage?
Add up your proposed new mortgage payment, taxes, insurance, and any other debts that will remain after closing. Divide this by your gross monthly income to get your projected new DTI ratio.
Can I get approved for a jumbo loan with a credit score under 700?
It is possible but very challenging. Most lenders want at least a 680 FICO for a jumbo mortgage. A score in the 600s will make approval unlikely unless you have a large down payment and no other risk factors.
Is it easier to qualify for a jumbo loan as a first-time home buyer?
Not necessarily. First-timers tend to have lower credit scores and fewer assets. Most lenders want to see strong credit history and money reserves when approving a jumbo mortgage application.
How long does it take to improve your DTI enough to qualify for a jumbo loan?
It depends on your situation, but most people find they can improve their DTI by 5-10% over a 6-12 month period by paying down debts and increasing income. Small, gradual changes really add up over time.
Following mortgage best practices around minimizing your DTI, having strong credit, and making a sizable down payment gives you the best shot at getting
Who qualifies for a jumbo mortgage?
In the United States, most mortgages are purchased by Freddie Mac and Fannie Mae. These government sponsored enterprises (GSEs) buy loans from lenders and, in turn, sell them to investors. This helps reduce the risk to lenders and allows them to offer affordable lending to people across the country.
Unlike most conforming sized loans, jumbo mortgages are not purchased by the GSEs. This means the lender takes on a bigger risk. To offset that risk, lenders typically require higher standards from borrowers. In order to qualify for a jumbo loan, you may need:
- Higher minimum credit score
- Higher cash reserves
- Lower debt-to-income ratio
- Lower loan-to-value ratio
Loan-to-value, or LTV for short, refers to the amount of your loan compared to the lesser of the purchase price or appraised value of a home. When you purchase a home, it’s used as collateral. If you default on your loan, the bank keeps the house and sells it to recoup some of their loss. Because of this, your lender wants to make sure the house you plan to purchase is worth more than the amount they’re going to loan you.
A bank determines the value of your home through an appraisal. When you apply for a mortgage, the bank will obtain an appraisal that will look at the size of your home, your lot, the homes condition and comparable listings in the area. When it comes to jumbo loans, lenders sometimes request two appraisals. This protects the lender, but it also helps ensure you dont pay too much for your home.
How does a lender calculate LTV?
When a lender calculates LTV, they look at the amount you plan to finance versus the appraised value or purchase price of the home, whichever is lower. LTV is the amount of the loan divided by the value of the home and converted to a percentage to show the ratio.
For example, lets say you want to purchase a home for $750,000. You plan to put 25% down ($187,500) which means the loan amount you need is $562,500. The appraisal confirms the value of the house is $730,000. When you compare the loan to your homes value ($562,500 ÷ $730,000), the LTV is 77%.
A combined loan-to-value ratio, or CLTV, is used when you want to take out a second mortgage on your home. The lender will now look at the combined total of all of your loans to be secured against the subject property compared to the value. The formula is the same, except you begin with the combined total of all loans. So, in this case, it would be (Loan 1 + Loan 2) ÷ value.
Remember, jumbo loans are a bigger risk to lenders because they are not sold to Freddie Mac or Fannie Mae so your lender will expect a lower LTV than if you were using a conventional loan. The more you can put down, the better your LTV will be.
A debt-to-income ratio (DTI) is just as it sounds — your total monthly housing and debt payments versus your gross monthly pre-tax income. Besides LTV, DTI is one of the most important aspects a lender will look at before they approve you for a loan. Why? Because the lender wants to make sure you have the ability to repay your loan.
If youre applying for a loan with your spouse or someone else, you may be able to use the combined income for both borrowers. However, this also means you need to include the debt of both individuals. If one of the borrowers has a high amount of debt and a comparatively low income, you may want to consider whether it makes sense for both people to be on the loan. Community property states may be different.