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Big Credit Scores Required for Jumbo Mortgage

By Sally Maison
Published: Friday, November 20th, 2009

Many people feel more confident to borrow huge loans now that the economy is showing signs of recovery. But specialists advise jumbo borrowers to consider their plan carefully since luxury prices are very vulnerable to instability in the market. Additionally, borrowers are reminded that they need huge credit scores to meet the requirements of banks.

Big Credit Scores Required for Jumbo MortgageJumbo lending poses great risks to creditors since it is very difficult to sell a luxury property if the borrower defaults. Moreover, such property can sell very cheap during market lows. Fannie Mae and Freddie Mac, the two government-back enterprises offering mortgages to Americans, do not provide mortgage amounts exceeding $1 million so consumers have to borrow them from huge banks.

Depending on the type of loan, jumbo lenders normally require clients to have a credit score of 720 or higher. Some banks require a rating of 760 or higher. With the national average credit score standing at 680, and the FICO score ranging from 300 to 850, it is not hard to see why majority of luxury property owners cannot refinance their homes. But experts note many other reasons why many homeowners find it difficult to qualify for big-time borrowing.

Most banks are going back to old lending standards and are requiring borrowers to have at least 20 percent of equity on their homes. However, homeowners cannot meet this requirement because of falling home values. Industry specialists explained that there is very little that these homeowners can do unless they are able to come up with enough cash to refinance at 80 percent property loan to value.

Not only do lenders require high credit ratings to decrease the chances of default but they also require borrowers to come up with financial records that prove that they do earn as they claim to be. Creditors are likewise stricter on debt-to-income (DTI) ratio and would not lend to borrowers whose DTI is above 38 percent.

Falling property values make creditors concerned about jumbo lending but experts say what they are doing right now only creates a downward cycle. Stricter standards only make property values go down and the decrease only makes it more difficult for many people to qualify for mortgage at present. This only leads to more short sale and foreclosure which eventually spur another series of decline in property value.

Specialists tell consumers though that banks have varying standards and offer different rates so it is worthwhile to shop around. They might not be able to meet the standards of other banks but some could be more lenient.

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