For many individuals and families, owning a home is a lifelong dream. However, with rising real estate prices, some may find themselves seeking financing beyond the conforming loan limit. In this instance, you’d need to apply for a jumbo loan. So whether you’re planning to buy a new construction home in Sioux Falls or a home in Harrisburg, let’s break down what a jumbo loan is in South Dakota, the 2023 conforming loan limits, and what’s needed to qualify for this type of loan.
What is a jumbo loan?
So what are jumbo loans in South Dakota? They are large loans that exceed the loan limits set by the FHFA for conforming loans. Jumbo loans allow borrowers to finance homes that exceed the conforming loan limit (CLL), making it possible to buy high-end properties that may not be otherwise affordable.
If the loan amount needed is more than the CLL, you’ll need a jumbo loan. Because of the larger loan amounts, jumbo loans typically carry stricter requirements and higher interest rates than conforming loans. Lenders may require a higher down payment, a lower debt-to-income ratio, and a stronger credit score to qualify for a jumbo loan in South Dakota.
What is the jumbo loan limit in South Dakota?
In South Dakota, the conforming loan limit is $726,200 across all counties. For example, the conforming loan limit in Minnehaha County is $726,200, so any mortgage that surpasses the loan limit designated for your county by even one dollar is classified as a jumbo loan.
As a reminder, the amount being borrowed is what determines whether or not you’ll need a jumbo loan, not the home price. So, if you were to put $100,000 down on a $780,000 home in Minnehaha County, the loan would be $680,000, which is under the conforming loan limit for this area. In this case, your loan wouldn’t be considered a jumbo loan.
For more information on the conforming loan limit in your county, use the FHFA map.
What are the requirements for a jumbo loan in South Dakota?
Borrowers must meet stricter requirements to qualify for a jumbo loan than they would for a conforming loan. The specific requirements can vary from lender to lender, but below are the typical requirements for borrowers seeking a jumbo loan.
Higher credit score: When it comes to receiving a jumbo loan, credit score requirements are typically more stringent than for conventional mortgages. It’s possible that some lenders may be willing to accept a lower score, a credit score of at least 720 is generally required to qualify for a jumbo loan. It’s essential to have a strong credit profile and a solid financial history to increase your chances of being approved for a jumbo mortgage.
Larger down payment: When buying a higher-priced home, buyers will typically need to make a more substantial down payment. While borrowers seeking traditional mortgages may be able to find programs that allow for down payments as low as 3%, those seeking a jumbo loan should expect to put down a minimum of 10%, and in some cases, as much as 30%. If a lender allows for a down payment of less than 20%, the borrower will need to pay for private mortgage insurance (PMI).
More assets: To qualify for a jumbo loan, lenders require borrowers to demonstrate that they have sufficient liquid assets or savings to cover at least one year of loan payments. The exact amount of assets needed can vary depending on the lender and the size of the loan, but having more assets can increase the chances of approval and potentially lead to better terms and interest rates.
Lower debt-to-income ratio (DTI): When applying for either a conforming loan or non-conforming loan, lenders will review your debt-to-income (DTI) ratio to assess your financial behavior and creditworthiness. The DTI ratio is calculated by dividing your total monthly debt payments by your gross monthly income. For conforming loans, some lenders may accept a DTI as high as 50%. However, for jumbo loans in South Dakota, borrowers are typically required to have a DTI under 43%, with a preference for a ratio closer to 36%. Maintaining a lower DTI can demonstrate financial stability and improve your chances of being approved for a jumbo loan with favorable terms.
Additional home appraisals: Your lender may require a second home appraisal for a jumbo loan, in addition to the standard appraisal, to get a second opinion on the property’s value. This is especially true in counties with limited comparable property sales. The second appraisal helps lenders ensure that they are providing funds for a property that is worth the loan amount or more.
This post first appeared on Redfin.com. To see the original, click here.