What is a jumbo loan?
A jumbo loan is a mortgage used to provide financing for properties that are over the conventional conforming loan limit. The maximum amount for a conforming loan is $548,250 in most counties, as determined by the Federal Housing Finance Agency (FHFA). Homes that exceed the local conforming loan limit require a jumbo loan. Alternatively, you can break down the loan into two loans to avoid the jumbo loan guidelines of requiring a 20% down payment.
Also called non-conforming conventional mortgages, jumbo loans are considered riskier for lenders because these loans can’t be guaranteed by Fannie and Freddie, meaning the lender is not protected from losses if a borrower defaults. Jumbo loans are typically available with either a fixed rate or adjustable rate mortgage, and they come with a variety of guidelines.
Qualifying for a jumbo loan
Underwriting guidelines for jumbo mortgages are tougher because the loans are larger and riskier for lenders.
Lenders may require your FICO score to be higher than 700, and sometimes as high as 720, to qualify for a jumbo loan. Mortgage Guru can now lend up to a $800,000 purchase price with a 680 score putting 5% down. Non-QM Lending has also opened up the jumbo market for borrowers that don’t meet the normal jumbo guidelines.
Debt-to-income ratio (DTI)
Lenders will also consider your debt-to-income ratio (DTI) to ensure you don’t bite off more than you can chew, though they may be more flexible if you have extra cash reserves. Most jumbo lenders have a hard cap of 45% DTI, however.
You’re more likely to be approved for a jumbo loan if you have ample cash in the bank. It’s not uncommon for lenders to ask jumbo loan borrowers to show they have enough cash reserves to cover 6 months of mortgage payments. This includes 6 months of mortgage payments for every property you own. You can possibly use your 401k or IRA for cash reserves.
To prove your financial strength, you’ll need extensive documentation, sometimes more than for a conforming loan. You should be prepared to provide your full tax returns, W-2s and 1099s when applying, in addition to bank statements and information on any investment accounts. There are jumbo mortgage options available that require no tax returns. Instead, you can provide 12 months of business or personal bank statements to provide income.
Certain lenders may require a second home appraisal for the property you’re planning to purchase. This is required when the loan amount is above $1,500,000. Please be aware that this could cause delays in your closing timeline.
Jumbo loans vs. conforming loans
The key difference between a jumbo mortgage and a conforming loan is a jumbo loan is a loan over your local county conforming loan limit. For a thorough look at the two, and the pros and cons of each, read about the differences between conforming and nonconforming loans.
Among the other factors that differentiate jumbo loans from conforming loans:
Heftier down payment
While low down payments are fairly common on conforming loans, jumbo loans are more likely to require a down payment of at least 20%, though some lenders may go as low as 10% with and without mortgage insurance. This is the main road block for consumers looking for homes over the conforming loan limit.
Possibly higher interest rates
Jumbo mortgage rates may be slightly higher than those on conforming loans, depending on the lender and your financial picture. However, many lenders can offer jumbo loan rates that are extremely close with rates on conforming loans — and some may even offer slightly lower rates depending on market conditions.
Higher closing costs and fees
Due to jumbo loans being bigger and there are some extra qualifying steps, expect higher costs at the closing table. This isn’t always the case depending on your situation.
The loan limit for conforming loans can vary by county because some real estate markets are much higher than others. For 2021, the conforming loan limit for one-unit homes in most counties nationwide is $548,250. However, in “higher-cost areas,” especially in the Northeast and on the West Coast, conforming loan limits are expanded to $765,600 — and even higher in a few other places. Please make sure you ask about these high cost areas before diving into the jumbo market.