A jumbo loan could be your ticket to buying a bigger and more expensive home if you qualify.
Jumbo loans are commonly available in amounts up to $2 or $3 million. And the requirements to qualify for a jumbo loan aren’t as stringent as they used to be.
If you’re planning to buy a high-priced home and think you might need a jumbo mortgage loan, here’s what you should know.
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A jumbo loan or ‘jumbo mortgage’ is any home loan that exceeds the limits for a conventional conforming loan. In 2022, a jumbo loan is a mortgage bigger than $ in most areas (though loan limits are higher in more expensive counties). Buyers looking to purchase a luxury home or a house in a high-cost real estate market may need a jumbo loan to finance their property.
Beginning earlier this year, conforming loan limits were increased. Limits for a single-family home now go as high as $ in most of the country. And they’re even higher in pricey locations like most of California, all of New York City, the District of Columbia, Alaska, and Hawaii: up to $ for a single-family home. Loans that surpass these limits are considered jumbo loans.
“If your requested loan amount is above $, the eligible financing would be dependent on what the county loan limit is for the home you want to purchase,” explains Robert Killinger, a senior loan officer with Mortgage Network in Danvers, Massachusetts.
“For example,” he says, “in Eastern Massachusetts [in 2022], the county loan limits go as high as $770,500. If you want to buy a home there and need to borrow $800,000, you’ll probably need a jumbo mortgage loan.”
Because jumbo loans are above the conforming loan limit set by the Federal Housing Finance Agency (FHFA), they are classified as ‘non-conforming.’
That ‘non-conforming’ title matters for borrowers. As non-conforming loans, jumbo mortgages are not eligible for purchase by Fannie Mae or Freddie Mac, the agencies that set lending requirements for most home loans.
Since jumbo loans don’t fall within Fannie and Freddie’s jurisdiction, lenders get to set their own requirements. What that means for you as a borrower is that guidelines for credit, income, down payment, and other important qualifying factors might vary from one lender to the next.
So if you’re in the market for an expensive home and a jumbo loan, make sure to shop around and find a lender that meets your needs.
Since jumbo loans are not centrally regulated, mortgage lenders get to set their own jumbo loan limits. For example, at the time of this writing in Mar. 2022, Rocket Mortgage offered jumbo loans up to $2.5 million while loanDepot allowed jumbo loan amounts up to $3 million.
Home buyers in ultra high-cost areas hoping to buy multi-million-dollar properties will likely want to look for local mortgage lenders that specialize in high-balance jumbo loans tailored to their market.
There are several advantages to choosing a jumbo loan if you need one.
“First, they offer higher loan limits for a larger house purchase,” notes Mayer Dallal, managing director at MBANC in Manhattan Beach, California. If you’re looking for homes at a certain price point — starting near $1 million or higher, depending on down payment — a jumbo loan may be your best and only option.
You also have the ability to choose from a variety of different loan programs.
“You could potentially get a 30-year fixed-rate loan, or you could get a jumbo mortgage with an adjustable rate, allowing you some flexibility in your loan terms,” Dallal adds.
Jumbo loans can also give you a leg up on competitors if or when a bidding war occurs.
“Jumbo mortgages are designed to allow borrowers to finance properties and homes in highly competitive local real estate markets,” says Joe DeMarkey, strategic business development leader at Reverse Mortgage Funding.
Jumbo loans are typically harder to qualify for than conforming mortgages. Lenders set stricter requirements because these extra-large mortgage loans carry extra risk.
“One con of a jumbo loan is that the applicant must have a top-tier credit score, often 720 or higher,” cautions Killinger.
Another is that the eligible debt-to-income ratio (DTI) used to determine your loan approval might be lower than would be required for a conventional or FHA-backed mortgage loan. So if you’re working with a higher level of existing debt, you may need to search for a jumbo lender that’s more flexible in this regard.
Additionally, you may have to pay a higher down payment on a jumbo loan than on a conventional or FHA loan.
“Anyone with sufficient income, credit, and down payment can qualify for a jumbo loan,” notes Bruce Ailion, a Realtor and real estate attorney in Atlanta.
To be eligible, your FICO score should be higher than 700 and, in some cases, 720 or above.
“Lenders will also investigate your DTI ratio to ensure that you don’t become overleveraged. Some [jumbo programs] won’t allow you to exceed a 45% DTI ratio,” DeMarkey says.
To prove that you are financially responsible when applying for a jumbo loan, be prepared to submit full documentation, including:
“Applicants are more likely to be approved for a jumbo mortgage loan if they have substantial cash in the bank, too,” says DeMarkey.
The good news is that jumbo loans aren’t just for repeat home buyers.
“If a first-time home purchaser meets all the required underwriting guidelines, they could certainly apply for a jumbo mortgage,” Killinger adds.
“Jumbo loans generally require a full 20% down payment, as opposed to conventional and FHA loan programs that may allow for a minimum 3% to 3.5% down payment,” explains Killinger. “However, some jumbo loans will allow for less than 20% down.”
DeMarkey echoes those thoughts. “In some instances, lenders may go as low as a 15% or 10% down payment,” he notes.
See our full guide to jumbo loan down payments for more information.
Ailion cautions that, “because jumbo loans are considered riskier than conforming loans, they often carry a higher interest rate.”
In a typical market, Killinger points out that jumbo loan rates may be 0.25% to 0.375% higher than for conventional loans.
In a typical market, jumbo loan rates may be around 0.25% to 0.375% higher than conforming loan rates. But this will vary by lender and borrower.
“However, in a rising rate environment like we are currently experiencing, it’s not uncommon to see jumbo loans be better priced than conventional loan programs,” Killinger says.
“Typically, the rates and pricing on conventional loans react more quickly to market volatility, and there tends to be a lag with jumbo rate adjustments. So if the timing is right, there may be a scenario where you could secure a lower interest rate on a jumbo mortgage than what is being offered on a conventional mortgage,” he adds.
While not all mortgage companies and lenders offer jumbo loans, many do. These include major banks, non-depository mortgage lenders, and some credit unions.
“The larger loan amounts are riskier for smaller lenders and banks because the loans take longer to pay off and there may not be a large enough consumer base in their market,” says DeMarkey.
Some jumbo loan lenders are more competitive than others, “so it makes sense to shop around and compare offers, rates, and terms carefully,” Ailion says.
Jon Meyer, licensed MLO and The Mortgage Reports loan expert, recommends working with a broker if you’re in jumbo loan territory. “They will have access to multiple jumbo products and will do the leg work in terms of figuring out which ones you qualify for and which you don’t,” he points out.
There are two possible ways to avoid a jumbo loan (aside from buying a less expensive home). These include:
The easiest way to sidestep a jumbo loan is by choosing a conventional loan and then making a down payment big enough to cover the difference between the home’s price and the conforming loan limit.
For instance, say the conforming loan limit in your area is $647,200 and you want to buy a home worth $800,000. If you make a 15% down payment ($120,000), your resulting loan amount will be $680,000. This is a jumbo loan because it’s above the local conforming loan limit.
But if you make a 20% down payment on the same home ($160,000), your resulting loan amount is $640,000. In this case you do not need a jumbo loan because your loan amount is within the local limit.
Another way to avoid a jumbo loan is with a strategy called a ‘piggyback mortgage.’
“Sometimes, having two mortgages in the form of a piggyback loan makes more sense for your situation. A piggyback loan let you buy a home with two loans, totaling 90% of the price plus a 10% down payment,” says Dallal.
An 80-10-10 piggyback loan includes two separate mortgages plus a down payment. The first mortgage is 80% of the home’s price, the second mortgage is 10% of the home’s price, and the down payment picks up the rest of the tab (another 10%).
“Some buyers of expensive homes choose piggyback mortgages to get around the stricter lending requirements for jumbo mortgages,” Dallal says.
Think a jumbo mortgage loan is right for you? It’s important to do your homework before committing to this financing option.
“Run your numbers carefully to learn what you can afford and what kinds of tax benefits you will receive,” suggests DeMarkey. “Also, determine if doing a piggyback loan might be a better choice for your finances in the long-term.”
In addition, save up as much money as you can before pulling the trigger on a jumbo mortgage.
“It’s critical that potential borrowers have a strong amount of reserves behind them after covering the applicable down payment and closing costs. It’s not uncommon for jumbo loan programs to require proof of 12 months of savings in reserve,” Killinger cautions.
Lastly, check your free credit reports and credit score and work to resolve any errors and increase your score before applying for a jumbo mortgage loan. The higher your credit, the lower your interest rate should be.
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