VA loans offer veterans the chance to get a loan with no money down. It’s an easier way to buy a home. But what happens when you need to borrow a large sum of money? At what point does the loan become a jumbo loan?
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The VA allows many different loan amounts throughout the country. However, it’s a uniform rule that any loan over $453,100 becomes a jumbo loan. What does that mean for you? Typically, it means tougher underwriting guidelines. We’ll help you decipher how they will affect you below.
WHAT DO YOU NEED TO QUALIFY?
There isn’t one blanket underwriting policy for VA jumbo loans. Each lender will have their own requirements. A few examples of what you may need include:
- Higher credit score – You can usually get a VA loan with a 620 credit score, but a VA jumbo loan may require a slightly higher score
- Lower debt ratio – Because the bank is at a higher risk of default, they may want you to have a debt ratio well below the 43% VA guideline
- More reserves – Typically you don’t need reserves for a VA loan but with a jumbo VA loan, some lenders require it. If you have money set aside to pay your mortgage if your income stops, it’s a great way to prevent default.
These are just a few of the things lenders ‘might’ require. What they actually require depends on the lender and your individual situation.
MAKING A DOWN PAYMENT
Despite the fact that VA loans offer 100% financing, you may have to make a down payment if you need a VA jumbo loan. The VA lender usually requires that you make a 25% down payment on the difference between the purchase price and your entitlement. Some lenders require a down payment on the difference between your loan amount and the county limit.
Each veteran starts their eligibility with entitlement for a loan worth $453,100. That is the amount the VA will guarantee in their name. Each county then has a limit, some of which are less than $453,100 and some, which are more than that amount.
If you need a loan amount above either the entitlement or the county limit, you may have to make a down payment on 25% of the difference. Here’s an example:
Let’s say your county limit is $453,100 as is your entitlement. You find a home for $500,000. Since the home price exceeds the county limit and your entitlement, the lender may require the following down payment:
$500,000 – $453,100 = $46,900 x .25 = $11,725
This may vary by lender though as each lender has their own requirements. In general, though, you can expect to make a down payment on a VA jumbo loan.
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COMPENSATING FACTORS HELP
Even though the VA has relaxed guidelines, having a few compensating factors can help your situation. Let’s say for example that you need to borrow $500,000 when the county limit is $453,100. If you had a 43% debt ratio and 620 credit score, you don’t give the lender a lot of reassurance that you’ll pay the loan back.
If, on the other hand, you have a 750 credit score and a 33% debt ratio, you show the lender that you are financially responsible and don’t have a lot of outstanding debt compared to your monthly income. In other words, you are likely to be able to easily afford your mortgage payments and make them on time.
Lenders look at a variety of compensating factors to help you qualify for a VA jumbo loan. Each lender will require something different, but the most common include:
- High credit score – If you have a credit score that exceeds the lender’s requirement for a VA jumbo loan, they may see it as a compensating factor. A great credit score means that you are financially responsible and able to manage your finances. This helps to lower your risk of default even if you need a jumbo loan.
- Low debt ratio – Each lender will have a maximum debt ratio they allow for a jumbo loan. If your debt ratio is even less than the requirement, the lender will see it as a positive factor on your loan application.
- Reserves – If your lender doesn’t require reserves for a jumbo loan, but you have them, it can be a compensating factor. Any money you have in a liquid account, such as checking, savings, money market, stocks, or bonds can be used as ‘backup’ should you be unable to pay your loan with your standard income.
- Large down payment – The more money you put down on the home, the less risk you put the lender at for default. Lenders like to you have ‘skin in the game.’ If you have a lower LTV than the program requires, it can increase your chances of approval.
As you can see, the compensating factors are similar to what lenders might require in order for you to qualify for a VA loan. It’s about what you can do above and beyond what lenders require. Any positive reasons you give a lender to give you a jumbo VA loan, the better your chances of approval become.