A jumbo loan is a loan which exceeds the national conforming limit guidelines. In most areas of the United States, this means loans higher than $417,000, but there are a few high-cost areas with higher standard limits. The good news is any loan that exceeds the national conforming guidelines are not overseen by Fannie Mae or Freddie Mac. The bad news is each lender has their own requirements. There is not one set minimum down payment requirement for jumbo loans – it is up to each lender.
The General Consensus on the Minimum Down Payment
If you were to poll several lenders in an area, you would probably find most lenders want at least 20 or 30 percent down for a jumbo loan. It makes sense, since these loans are rather risky. There is a large difference between losing out on a $100,000 loan as opposed to a $500,000 loan, for example. Lenders consider borrowers who are able to put down a larger down payment less risky because they have “skin in the game.” Not too many borrowers would walk away from a home which they invested between $100,000 and $150,000 in without a fight.
Exceptions to the Rule
Because jumbo loans are not overseen by anyone, such as Fannie Mae or Freddie Mac, they are considered a portfolio loan. This means every lender can create their own rules – one lender might require a 30% down payment while another requires only 5%. You will only know what each lender offers if you apply with them or at least inquire about their offerings. How do lenders require only 5% on such a large loan amount, though? Typically, these lenders require other compensating factors. This could mean a very high credit score or a large amount of reserves on hand. Each lender has their own threshold of risk they can handle.
Finding the Right Lender
Your exact circumstances will help you determine which lender is right for you. For example, if you have an average credit score, chances are most lenders will require a larger down payment from you. This is strictly because lower credit scores usually mean you were financially irresponsible somewhere along the way. This does not mean you have a myriad of late payments, though. There are many different factors figuring into your credit score. Maybe you have too much debt outstanding compared to your available credit or you do not have enough credit to secure you a higher credit score. For one reason or another, you have your specific score, though and the lender needs to figure out a way to make up for it.
If the lender does not require a higher minimum down payment, they might require other things which can work as compensating factors, such as:
- 12-24 months’ of reserves (money to pay the principal, interest, taxes, and insurance without income)
- A lower than average debt ratio
- A specific type of loan or term, such as only offering fixed rate terms rather than ARM loans
If you apply with different lenders within a short amount of time, your credit score does not get negatively impacted. This way you can figure out which loans offer you not only the best interest rate, but the lowest costs as well.
Competition Helps your Case
The more lenders offering jumbo loans, the better off you will be in the end because lenders have no choice but to lighten up their requirements. If a lender requires a 30% down payment, 740 credit score and 12 months’ of reserves while the bank down the street requires only a 10% down payment, 700 credit score and no required reserves, chances are more borrowers will go to lender #2. If you want to find the best terms and the lowest minimum down payment, shop around and let the lenders know you are doing it. This way they will come up with more lucrative terms for you in order to lure you into their programs.
The other benefit of the jumbo loans and lack of an entity overseeing them is the lack of need for private mortgage insurance or any other type of protection. Even if you borrow more than 80%, you will not find many loans which require you to pay an extra premium on top of the principal and interest you already pay. You may, however, find lenders who require you to set up an escrow account for your taxes and insurance. This is just another way to protect the lender in the event you stopped paying your real estate taxes or homeowner’s insurance, both of which could affect the lender’s ability to secure payment should you default on the loan.
The minimum down payment on jumbo loans really is all over the board, depending on which lender you use and what type of qualifications you bring to the table. If you do not like the program one lender offers you, apply with different lenders to see what they have to offer. Chances are you will find a program which suits your needs and does not require you to break the bank with your down payment.