Joseph Caltabiano
Senior Vice President of Mortgage Lending
Guaranteed Rate

Q: My client wants a jumbo loan. What will that entail?

A. Jumbo loans take up about 50 percent of my business, and I have come across many types of situations as a result.

Jumbo loans are full document loans in most instances, especially to get the best rates. Guaranteed Rate requires two years of entire tax returns, including all pages, schedules, W2s, K1s and any business tax returns for the last two years for any company that someone owns more than 25 percent of. It’s that amount of documentation that can sometimes lead to difficult deals. In some instances, I have encountered an individual who owns four or five companies, some large and some small, and we need all the tax returns for each of these businesses, which can become quite cumbersome. Wealthy people tend to move money from place to place, and for them to apply for a jumbo loan, we need a paper trail for every single dollar. While this insane amount of documentation can be avoided (because they only require documentation on deposits that are required for the transaction – down payments, closing costs, etc. – or just one year of tax returns for loans up to $1 million), your clients will end up receiving slightly higher rates in return.

Self-employed jumbo homebuyers can be even more difficult. When clients are self-employed, they have the ability to write many of their expenses, thus bringing down their adjusted gross income, which makes qualifying harder. By letting clients know what kind of expenses they can add back into their income, such as a self-employment tax, IRA deductions and depreciation, this can allow a lender to use more of their income and make it easier for them to qualify for a jumbo loan.

Through my experience, the majority of the clients I work with who want jumbo loans are usually able to avoid jumbo loans altogether by choosing a “piggy-back” loan. A borrower would want to avoid a jumbo loan because conforming rates are smaller, or they only need to borrow such a large amount because they are selling another home or waiting for a commission check. To avoid a jumbo loan, buyers would take a first mortgage for the conforming loan limit, then a second mortgage or HELOC to make up the difference. Once they receive extra money, they can pay the second mortgage off and are left with only the interest rate on the first mortgage loan.  Qualifying for piggy-back loans is limited to clients with above average credit (700+) and DTI below 45 percent, with a max combined loan to value of 90 percent.

Agents should make sure their clients are aware of jumbo interest rates and know exactly what they can and will qualify for. It’s very common for homebuyers to assume that jumbo rates are the same as conforming rates when, in fact, they are usually higher.

In addition, agents should provide all the details about a property to the lender as soon as possible. Jumbo lenders are very particular about condo properties, which usually need to be 51 percent owner-occupied, have 10 percent of the income for the building budgeted for reserves and no significant litigation that can impact the livability or marketability of the property.