Are you in the market for a jumbo loan? If so, be prepared for some extra scrutiny. Mortgage lenders are typically more strict when considering jumbo loan applicants, particularly where credit scores are concerned.
Credit-score standards and criteria vary from one lender to the next. There is no single cutoff point used across the board. In 2015, many mortgage companies seem to be setting the bar around 600 or 620 for a conforming home loan, and upwards of 650 for jumbo products. (This is on the FICO scoring scale, which goes from 300 to 850.)
The good news for borrowers is that we’ve seen some easing in the mortgage market lately, where non-conforming loan products are concerned. More on that in a moment. First, let’s talk about what a jumbo loan is, and why lenders have higher standards for the borrowers who use them.
Jumbo Mortgage Loans Defined
The concept of jumbo versus conforming home loans relates back to Fannie Mae and Freddie Mac. These are the two government-sponsored enterprises, or GSEs, that buy and sell bundled mortgage loans on the secondary market (think Wall Street).
Federal laws limit the size of loans Fannie Mae and Freddie Mac can acquire. Anything that falls within these size limits is a conforming loan. Anything larger than those limits is considered a “jumbo” loan, and is therefore not eligible for GSE purchase.
Conforming loan limits vary by county. They are established by the Federal Housing Finance Agency (FHFA), which also oversees Fannie and Freddie. Each year, the FHFA reviews loan limits in relation to home prices and makes adjustments if necessary.
According to LoanLimits.org, the current limit for single-family home loans for most counties across the U.S. is $417,000. In more expensive areas, like Los Angeles and New York City, the conforming cap can be as high as $625,500. In Hawaii, it can be even higher.
Mortgage lenders commonly impose higher standards for borrowers who are seeking a jumbo loan, simply because there’s more money involved. A bigger loan is a bigger risk to the lender, especially when they can’t turn around and sell it to the GSEs (which is usually the case with non-conforming products). So they often require larger down payments and higher credit scores for jumbo loans, when compared to the smaller / conforming mortgage products.
Surprisingly, however, jumbo loans offer lower rates on average than their smaller conforming counterparts. It wasn’t always this way. But that has been the trend for the last few years, due to shifting demand within the secondary mortgage market.
Minimum Credit Score Needed for Jumbo
As mentioned earlier, there is no industry-wide standard for jumbo loan credit scores. Mortgage lenders have their own, often unique, ways of underwriting home loans and qualifying borrowers. The one thing you can be sure of is that a higher credit score will increase your chances of qualifying for a jumbo loan.
These days, a lot of lenders want to see a credit score of 650 or higher for borrowers seeking a jumbo mortgage product. But that number is not set in stone. Other lenders will go below that level if they feel the borrower is a strong candidate for a loan. Borrowers with high income and a lot of assets, for example, often get a “pass” in the credit score department.
Signs of Easing in the Mortgage Market
I mentioned some good news at the start of this story. Here it is. The jumbo loan market has loosened up some over the last couple of years. We first got wind of this in September 2014, when CNN did a story on the subject.
According to the CNNMoney report from last fall:
“During the past several years, most jumbo borrowers needed at least a 700 credit score to get a loan. But now [fall 2014] lenders are giving loans to borrowers with credit scores of as low as 650.”
Additional signs of easing came earlier this week, when the Mortgage Bankers Association (MBA) released the latest results of its Mortgage Credit Availability Index.
According to Mike Fratantoni, Chief Economist with the MBA:
“Mortgage credit availability increased in August and has increased in eight of the last nine months. While much of the loosening has been for jumbo loan products, the availability of conforming conventional mortgage credit has also somewhat increased…”
The bottom line is that credit score requirements are generally tougher for jumbo mortgage loans. But it might be getting a little easier.