Jumbo Loan Reserve Requirements: What You Need To Know

Jumbo loans allow borrowers to get mortgages above the conforming loan limits set by Fannie Mae and Freddie Mac. But with greater loan amounts comes greater risk for lenders. That’s why jumbo loans have stricter eligibility requirements, including higher reserve requirements.

What Are Reserves?

Reserves refer to the cash borrowers have left over after paying monthly debts and expenses Reserves provide a financial cushion and demonstrate to lenders that borrowers can withstand unexpected expenses or income disruptions without missing mortgage payments,

Lenders want to see reserves in the form of liquid assets like checking/savings accounts, stocks, bonds, and retirement accounts Less liquid assets like cars, collectibles, and real estate don’t count

Why Are Reserves Important For Jumbo Loans?

Since jumbo loans exceed conforming limits, they are riskier for lenders. Borrowers with substantial reserves are less likely to default if they encounter financial difficulties. Strong reserves assure lenders that borrowers can handle mortgage payments even if:

• Income is reduced due to job loss, reduced hours, etc.
• Expenses rise due to illness, repairs, etc.
• Other major unexpected costs occur

Requiring adequate reserves enables lenders to offer jumbo loan programs while still managing risk. Reserves essentially act as extra collateral.

Jumbo Loan Reserve Requirements

Jumbo loan reserve requirements vary by lender but are generally higher than conventional loans. Here are some typical jumbo reserve requirements:

• 6-12 months PITI: Many lenders require jumbo borrowers to have 6-12 months of PITI (principal, interest, taxes, insurance) payments in reserves. So if your PITI payment is $3,000, you’d need $18,000-36,000 in reserves.

• 6-12 months expenses Some lenders base reserves on monthly expenses instead of PITI payments. Expect to show 6-12 months of total monthly debts like credit cards auto loans student loans, etc.

• 10-20% of loan amount: In addition to monthly payment/expenses reserves, some jumbo lenders require 10-20% of the total loan amount in reserves. So on a $700,000 loan, you’d need $70,000-140,000 reserves.

• Higher for investment properties: Reserve requirements tend to be even greater for jumbo loans on investment/rental properties and second homes. Lenders may require up to 24 months PITI/expenses.

• Higher for lower FICO scores: Borrowers with lower credit scores are seen as higher risk. To compensate, lenders may increase reserve requirements for jumbo borrowers with FICOs below 700.

Tips For Meeting Jumbo Loan Reserve Requirements

It can take years to build up substantial cash reserves. Here are some tips that can help jumbo borrowers meet reserve requirements:

• Save aggressively for your downpayment first so you can make a larger downpayment and need to finance less. This reduces required reserves.

• Pay down debts to lower your monthly expenses and DTI. This can offset lower reserves.

• Ask relatives for gift funds or personal loans to add to your reserves. Get gift letters.

• Liquidate or borrow against stocks, bonds, 401(k)s if permitted. This converts assets into reserve cash.

• Seek lender exceptions or find alternate reserve assets like retirement accounts.

• Improve your credit. Higher FICOs may qualify for lower reserves.

• Buy lower to conforming limits if possible so you can qualify for a conventional loan with lower reserves.

Shop Multiple Jumbo Lenders

Each jumbo lender sets their own reserve rules, so requirements can vary significantly. When shopping for a jumbo loan:

• Ask about reserve requirements upfront before applying
• Compare reserve rules from multiple lenders
• Focus on lenders offering lower reserves/exceptions based on your specific qualifications
• Avoid assuming you can’t qualify and shopping only one place

Taking the time to shop and compare jumbo reserve requirements can really pay off by helping you find a match.

Alternatives If You Can’t Meet Requirements

What if you simply can’t meet a lender’s jumbo reserve rules? You still have options, including:

• Piggyback loan: Take out a conforming first mortgage under conventional limits plus a second piggyback mortgage for the remainder. Piggyback loans have easier requirements overall.

• Cross-collateralize: Use multiple properties to secure the jumbo loan. Reserves from all properties can count.

• Interest-only loan: Pay interest-only for 5-10 years to lower payments, so lower reserves are acceptable. You begin paying principal and interest later.

• Family pledging reserves: Have relatives pledge their own reserves to cover your jumbo loan. Requirements vary by lender.

• Jumbo lite programs: Some lenders offer special “jumbo lite” programs with easier reserves for loan amounts just above limits.

Talk to an experienced jumbo loan officer to discuss these and other options if you’re having trouble meeting jumbo reserve requirements. They can help tailor solutions to your specific financial circumstances.

The Bottom Line

Jumbo loan reserve requirements are higher than conventional loans but can still be met through diligent savings, strategic financial planning, and smart shopping. Taking the time to understand reserve rules and find the right jumbo lender match is worth the effort to buy the home you want.