Housing on a High

You're ready to buy a home but live in one of the nation's priciest housing markets. Inventory is low. Demand is high. And homes routinely cost over $1 million.

Trouble is, you don't have $1 million. You're not trying to live in some swanky bungalow or massive McMansion. And you're not planning on switching zipcodes any time soon.

What can you do? Get on the phone and talk to a lender about taking on a jumbo mortgage, a class of home loans that pack the same financial heft its name implies.

A type of non-conforming loan, jumbos in most housing markets can buy you a home worth more than $424,100 — the limit for "conforming loans" supported by mortgage giants Fannie Mae and Freddie Mac. Non-conforming loans are any that exceed that funding limit, which used to be $417,000 until the Federal Housing Administration increased it this year.

In some high-priced markets, the minimum financing threshold starts at $625,500.

Don't let the six figures frighten you. Jumbos aren't reserved for the mega rich. In fact, depending on where you live, they may be the key to getting you the home of your dreams, even if you're living on a budget. We'll explain:

Bigger loans for bigger ballers? Not really

Let's reiterate: Borrowers who qualify for jumbo loans don't necessarily live at the top rung of the socioeconomic ladder. In fact, they're typically moderate-income people living in housing markets where the cost of living is steep.

The demographic of who gets a jumbo loan runs the gamut, says Samuel Lee, a Movement market leader in San Diego, Calif. In his market, for instance, $830,000 recently landed a family of six in a home that's 1,800 square feet on less than 5,000 square feet of land.

"They're not rich, not at all," Lee says. "They had to get a gift from family to make it work."

You'll find different scenarios in different parts of the country.

Take San Francisco, one of the most expensive housing markets in the country today. It's also a city where the cost of living is nearly 63 percent higher than the U.S. average, according to data cited by finance firm SmartAsset.

Two people who live there in the same home and make a combined $100,000 a year are considered middle class, according to income data from the Pew Research Center. Compare that to Charlotte, NC, where a combined $100,000 income lands a two-person household in the city's highest income bracket.

That means it's unlikely someone buying a home with a jumbo loan in Charlotte is buying the same kind of home as a jumbo borrower in certain parts of California.

Are they harder to get?

Yes, and no.

Because jumbos are too big for government backing, lenders service the loans themselves instead of selling them to Fannie Mae or Freddie Mac.

That means more of the lender's money is on the line, which means the standards to qualify for a jumbo loan are higher. What does this mean for you? Here's a breakdown:

• Credit score: You may be able to snag a conventional loan with a credit score of 660, or even lower. Qualifying for a jumbo, however, may require a score of 700 or more.

• DTI (debt-to-income) ratio: Lenders use this metric to gauge how much of your income is devoted to paying your debt if a mortgage were included. Generally, lenders will approve you for a loan with a DTI between 45 to 50 percent. For a jumbo loan, however, some experts say it's best to have a DTI that's 38 to 41 percent or lower.

• Down payment: Jumbo lenders want more of your skin in the game. That means most jumbo borrowers are expected to put at least 20 percent down, if not more. A lot of jumbos don't come with private mortgage insurance, which is why lenders require a higher down payment.  

• Cash reserves: Some conventional lenders might be OK with borrowers having six months (or less) of cash reserves after closing on their loan. Jumbo lenders, though, may want to see borrowers with 12 to 24 months of reserves in the bank. That includes enough money to cover the principal balance of your mortgage, along with the associated interest, taxes and insurance. Lee puts a value on it: Depending on the market, borrowers may need up to $100,000 in reserves before taking out their jumbo.

Different rules may apply

Not all jumbo loans are created equal. That is, different lenders may cap how much jumbo money they're willing to lend.

For example, some lenders won't offer loans over $2 million or $3 million. Others will go as high as $7 million, or even $15 million. Borrower requirements for getting a jumbo may also vary from lender to lender.

Why? There are very few standards, Lee says.

Remember, government-sponsored enterprises like Fannie Mae and Freddie Mac don't buy these loans because of their large size and considerable risk. Instead, lenders sell jumbo loans to investors who aren't beholden to any specific regulations or rules.

"There is just no specific standard that really governs how different investors perceive and view jumbo mortgages," Lee says. "It's just too broad. It all depends on the appetite of the investor."

How do I prepare for a jumbo?

So you're ready to give this home buying thing a try even though the price tag is a little high. Here's how you should prepare if the home of your dreams is worth the cost:

• You know the down payment is going to be a little higher than a conventional mortgage. Start saving for it now.

• Need a credit score boost? Pay off some of your lingering debt so your score goes up and your debt-to-income ratio improves.

• Start talking with a lender now, and seek pre-approval. Movement offers borrowers up to $2 million in jumbo financing, and a variety of programs and products to fit your unique situation. Reach out to one of our loan officers for more information.

• Investigate your options and find a responsible lender capable of suiting your needs. Because lenders treat jumbos differently, your credit score may not have to be exceptionally high to qualify. The same goes for interest rates. While rates on jumbos are generally higher than their conventional counterparts, more lenders are beginning to offer jumbo rates that are on par with your more common 30-year fixed-rate mortgage.