When you buy a property, you may need to take out a mortgage to finance the purchase. But what happens when your potential mortgage amount is higher than the government allowed borrowing limits? A jumbo loan can come to your rescue.
It is common for the government to limit the mortgage amount you can borrow depending on your location. And while average-priced properties may fit within these ranges, certain home purchases may exceed the set limit. Thanks to jumbo loans, you can take out larger loans to finance the purchase of costlier properties.
In this article, you’ll learn the following:
- What is a jumbo loan?
- What are jumbo loan limits?
- How to qualify for a jumbo loan?
- Is a jumbo loan a conventional loan?
- Are jumbo mortgage rates higher?
- Who should take out a jumbo loan?
What is a Jumbo Loan?
As the name implies, a jumbo loan is designed to cater to home purchases requiring a mortgage that exceeds the maximum conventional conforming loan amount or limits set by the Federal Housing Finance Agency (FHFA).
Jumbo loans come with several benefits, such as no private mortgage insurance requirement and a higher loan amount. However, due to the greater risk to the lender, jumbo loans may come with a stricter loan requirement when compared to conforming loans.
Jumbo loans aren’t much different from a traditional mortgage aside from their size, terms, and features. Payment schedules and types of interest rates are usually more or less the same. You can get a fixed-rate or adjustable-rate jumbo loan with various mortgage term options. If you are looking to finance an investment property or buy homes in high-end real estate markets, a jumbo loan may be an excellent alternative for you.
What are Jumbo Loans Limits?
Each year, the conforming loan limits are usually set by the FHFA, with the 2022 limits on conforming loans set at $647,200 for one-unit properties in most counties, an increase of $98,950 from $548,250 in 2021. In higher-cost areas, where 115 percent of the local median home value exceeds the baseline conforming loan limit, the ceiling is $970,800 for one-unit properties. When your mortgage amount exceeds these figures, you may need to apply for a jumbo loan.
Major metro areas tend to have higher conforming loan limits. So, what may be considered a jumbo loan in one county may fall under conforming loan limits in another. More importantly, jumbo loan limits are determined by the median home values of an area. You can find out your county’s specific conforming loan limits on the FHFA website.
How To Qualify for a Jumbo Loan
Qualifying for a jumbo loan is one of the biggest challenges for the average loan consumer. Since Fannie Mae and Freddie Mac do not back jumbo loans, lenders are exposed to more lending risks. It is, therefore, common for lenders to tend to impose stricter underwriting requirements.
Like conforming mortgages, jumbo loan approval is also based on the same requirements ─ credit score, debt-to-income ratio, income, down payment, and employment status. Let’s take a deeper look into a typical jumbo loan requirement.
- Credit Score: lenders may require your FICO score to be higher than 700 and even as high as 740 to qualify for a jumbo loan. However, it is possible to qualify for a jumbo loan with a credit score of 660, but you may have to present a very low debt-to-income ratio.
- Debt-to-income ratio: it is common for jumbo loan lenders to consider your debt-to-income ratio when underwriting you for a jumbo loan. Most jumbo lenders will approve your loan request even with a high DTI if you have plenty of cash reserves. However, some lenders may stick to a hard cap of 45% DTI even if you have a large down payment.
- Cash reserves: you are more likely to be approved for a jumbo loan if you show enough cash reserves. It is not uncommon for jumbo loan lenders to request that borrowers prove they have enough cash to cover one year of mortgage payments. Lenders may disqualify you if you have recent cases of foreclosures.
- Employment, financial, and tax documents: to prove your finances are in order, you’ll need to provide extensive documentation compared to a conforming loan. When applying for a jumbo loan, you should be ready to provide your lender with your full tax returns, W-2, and 1099s. Expect also to provide copies of your bank statements, employment records, and other income-related documents.
- Down Payment: as a general rule, you can expect to make a down payment of at least 10% when taking out a jumbo loan. Some lenders may require a minimum down payment of at least 25% or even 30%. For most jumbo loan lenders, a 20% down payment is often the benchmark.
- Appraisal: depending on the lender, you may need to conduct a second home appraisal for the property you are looking to acquire.
Keep in mind that if your application lacks in one area, you can make up for it in another area. For example, if your credit score is lower than the recommended figure, you may qualify for a jumbo loan by committing to a larger down payment or higher cash reserves.
Is a Jumbo Loan a Conventional Loan?
Jumbo loans do fall under the category of conventional loans. While the term “conventional loans” refers to loans that are not part of a specific government program. Conventional loans are mainly divided into conforming and non-conforming loans.
Conforming loans are guaranteed by Fannie Mae and Freddie Mac and have a maximum loan limit that is set and controlled by the FHFA. The majority of the rules guiding conforming loans are instituted by Fannie Mae and Freddie Mac, two of the leading companies providing backings for conforming loans.
Non-conforming loans, on the other hand, are less regulated and not under the control of either of the government-sponsored enterprises. Rules of eligibility, pricing, and features are determined mainly by lenders. Since jumbo loans are not regulated by any GSEs and offer loan amounts greater than the conforming limits, they can be regarded as a non-conforming conventional loans.
Are Jumbo Mortgage Rates Higher?
The interest rate for a jumbo loan may be slightly higher compared to conforming mortgage loans. This is to compensate the lender for the greater risks they take on by extending you a larger mortgage amount. However, your credit score, down payment, cash reserve, DTI, and chosen lender play a major role in the interest rate you receive. In fact, there are situations where a jumbo loan may have a lower rate than a conventional mortgage.
As of June 3, 2022, the national average 30-year fixed jumbo mortgage APR is 5.380%. The average 15-year fixed jumbo mortgage APR is 4.960%, according to Bankrate’s latest survey of the nation’s largest mortgage lenders. Typically, the difference between conforming and non-conforming loans hovers from 0.25% to 1%.
Who Should Take Out a Jumbo Loan?
Just because you qualify for a jumbo loan doesn’t mean you should take one out. You should only consider taking out a jumbo loan if you fall into the following category:
- You plan to purchase a high-priced house in an expensive real estate market
- You have a spotless credit history
- You have a large amount of cash reserves
- You have a steady high income
If you plan to purchase a property with a mortgage that exceeds the conforming limits set by the FHFA, then taking out a jumbo loan is your best bet. While it is safe to say that qualifying for a jumbo loan is more complex than a conforming mortgage, a jumbo loan can be your best option when it comes to expensive home purchases.
Please consult with your tax advisor to determine if a jumbo loan is right for your current mortgage financing needs. Ready to buy your dream home? Check today’s rates and get pre-qualified in less than 2 minutes.
Elijah O. Agor, CFP
Elijah O. Agor is a real estate, 1031 exchange, and mortgage writer. He is a certified financial planner, former loan originator, and chief realtor for Dsquared Realty. In the past, Elijah advised first-time and seasoned home buyers on real estate and mortgage decisions in the Greater Atlanta area. Since hanging up (burning) his suits and ties, Elijah now works to make mortgage and real estate topics understandable and jargon-free.