If you are self-employed and want to acquire a home with mortgage limitations above the standard, then a jumbo mortgage loan may be available in the future. These loans are meant to fund pricier homes; however, unique challenges arise with jumbo loans, especially for borrowers who report their income based on employment. Here is a simple explanation to help clarify what to expect and how best to work the process.
What Is a Jumbo Loan?
A jumbo loan is a home mortgage product where one finances a house with a value greater than conventional loans, which the Federal Housing Finance Agency (FHFA) caps in most places based on where you live. As of 2024, this cap is about $766,550, but this keeps changing depending on where you live. Jumbo loans apply when amounts are over this.
Why Are Jumbo Loans Tricky For The Self-Employed?
The jumbo real estate loan can be relatively difficult to acquire for a self-employed person compared to other individuals with full-time jobs due to a lack of such traditional documents as W-2s and pay stubs.
Well, in this case, jumbo mortgage lenders will depend on other ways of determining one’s source of income and financial stability. It makes the whole process more complex, taking a lot of time.
Here are some of the key factors that lenders use to determine this:
- Income Verification: Lenders will require extensive documentation to verify your income. Examples may include two years of tax returns, profit and loss statements, etc. If your income is not stable, for instance, if you are self-employed, then lenders may average the last few years to identify a pattern of stability.
- Credit Score: Credit score requirements for jumbo loans are much higher. In most instances, the requirement is a minimum of 680 or 700; over 740 is the best way to obtain the lowest rates possible. Improving the credit score before application would significantly improve the chances of approval.
- Debt-to-Income Ratio or (DTI): Lenders will review your debt-to-income ratio and the relationship of your monthly debts to your gross income. This must usually be under 43 percent to qualify for a jumbo loan.
- Down Payment: Jumbo loans require significantly more down payments than traditional loans. Typically, a lender will ask for an amount equal to 20% or more of the house value as the down payment. However, a few lenders let you purchase a home with as little as 10% down if you have a superb financial profile.
- Cash Reserves: In order to qualify for the jumbo loan, the lender can request that you have cash reserves that stand for six to twelve months of mortgage payments. If your income is variable, the cash reserve protects the lender because it ensures that you will have enough funds to pay for future installments.
Types Of Jumbo Loans For Self-Employed Borrowers
#1 Bank Statement Loans
It’s ideal for freelancers and other self-employed applicants. The process here is that instead of considering tax returns as proof of income, lenders look through your bank statements within the last 12-24 months to decide whether or not you qualify. It’s incredibly excellent for those whose income may fluctuate.
#2 Asset-Based Loans
For instance, you may qualify for an asset-based loan with ample assets, but the reported income is minimal. To determine this, lenders will consider your stocks, savings, and investment portfolios.
#3 Non-QM Loans:
Non-Qualified Mortgage, short for Non-QM, refers to a loan tailored for borrowers who do not meet the standard requirements of a traditional mortgage. It is relatively more flexible concerning documentation but might incur a slightly higher interest rate.
Common Pitfalls That Arise While Applying For Jumbo Loans As a Self-Employed Borrower
Self-employed borrowers usually fall under the following mistakes:
#1 Inconsistent Documentation:
Borrowers want to present a steady income, which is notoriously challenging for self-employed individuals whose incomes may rise and fall over a year. Less publicized are the benefits of working with an accountant to present the income with the least amount of volatility. Employ adjusted profit and loss statements as a marker of consistency rather than using only annual tax returns.
#2 Cash Flow
Lenders don’t just look at income levels; they want continuous liquidity. To prove that cash flow is adequate to service large mortgage payments, business and personal finances must be kept separate. Most of my clients have survived by building an income buffer account to prove to lenders they have additional liquidity for times of low income.
#3 Overlooking Alternative Loan Products:
Most clients concentrate on traditional jumbo loans, but bank statement loans, asset-depletion loans, or even DSCR loans with looser qualifying criteria for the self-employed are some non-traditional options. Those products allow retirement accounts or rental income to be used to qualify.
Building the Right Financial Profile for a Jumbo Loan As A Self-Employed
Numerous self-employed borrowers have been rejected because they don’t know how to prepare their financial profiles.
1. Optimizing Your Debt-to-Income Ratio (DTI):
If your DTI ratio is too high, lenders may shy away from lending to you, even if you earn a very high income. Not so well known is the fact that even if you pay off your debt first (e.g., credit cards or car loans), it will dramatically reduce your DTI. So, there is an increased chance of an approval. Typically, you want to hold your DTI below 43%.
2. Creating a Good Credit Profile:
Credit is what makes or breaks a jumbo loan deal. For you to make your credit profile sound and strong:
- Be timely in all the repayments of the debts.
- Credit cards must be used with less than 30% occupancy of any limit.
- Avoid applying when you have received a new debt or anticipating a loan.
Pro tip: A few lenders give their clients credit score improvement plans if their credit score is not excellent. They might allow you to qualify soon.
3. Cash Reserves and Asset-Based Loans:
Cash reserves aren’t just an afterthought but a safety net for lenders. If you cannot demonstrate substantial cash reserves, an asset-depletion loan can be the perfect substitute for you. In these loans, your assets-whose fluctuations have caused market jitters-are liquid and can be capitalized upon to help meet your reserve needs.
Maximizing Your Success Rate: Expert Strategies To Get A Jumbo Loan As a Self-Employed
Do Business with a Specialized Lender:
Not all lenders can handle the sophistication of jumbo loans with non-traditional income verifications. Moreover, a qualified jumbo loan lender is critical. Specialized lenders are more likely to offer flexible terms, bank statement mortgages, and interest-only options for easier approval.
Apply for Pre-Approval:
Being pre-approved tells sellers and realtors that you’re a serious buyer and lets them have no questions about your financial position. In competitive markets, having a pre-approval also means reducing the time from offer to closing.
Look Ahead to Your Future:
After the underwriting stage of approval for the jumbo mortgage, your income must be stable enough to cover mortgage payments. Of course, I always advise clients to plan financially, save 12 months’ worth of expenses in an account, and overcome those inevitable temporary gaps in income.
Final Thoughts: Securing Your Jumbo Loan as a Self-Employed Borrower
Understanding jumbo loans may be challenging, but for self-employed people, the proper guidance and preparation will make it achievable. The way forward is adequate preparation for more stringent challenges, such as stricter income verification and higher credit score requirements.
Utilizing the available alternative loan products and working with a specialized lender, like Munshi.Biz, you can secure financing for that dream home, regardless of the complexities of self-employment.
