What is Jumbo loan?

Jumbo loan rates home limit requirements

A jumbo loan, often known as a jumbo mortgage, is a form of loan that exceeds the Federal Housing Finance Agency’s lending limits (FHFA). A jumbo loan, unlike a standard mortgage, cannot be acquired, guaranteed, or securitized by Fannie Mae or Freddie Mac. Jumbo mortgages are designed to fund luxury houses and homes in extremely competitive local real estate markets. They have special underwriting criteria and tax implications. As the housing market recovers from the Great Recession, these types of mortgages are becoming more popular.

A jumbo mortgage’s value varies by state—and even by county. The Federal Housing Finance Agency (FHFA) determines the conforming loan maximum size for various areas on an annual basis; however, it rarely varies. For most of the country, the cap was set at $484,350 in 2019. In 2018, the amount was $453,100, up from $453,100 in 2018. The baseline limit for counties with greater property values is set at $726,525, or 150 percent of $484,350.

For loan limit calculations, the FHFA has a different set of rules for regions outside of the continental United States. As a result, the jumbo loan maximum in Alaska, Guam, Hawaii, and the US Virgin Islands is also $726,525 as of 2019. In counties with greater home values, the figure might be substantially higher.

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How to qualify for a Jumbo loan

Because Jumbo loans are larger and riskier for lenders, underwriting criteria are more stringent. Items you will need to qualify for a Jumbo loan:

  1. Credit score: To qualify for a Jumbo loan, lenders may require a FICO score of at least 700, and occasionally as high as 720.
  2. Debt-to-income ratio: Lenders will look at your debt-to-income ratio (DTI) to make sure you don’t get into too much debt – they may be more lenient if you have a lot of cash on hand. However, some Lenders have a hard cap of 45 percent DTI.
  3. Cash reserves: If you have a lot of money in the bank, you’ll have a better chance of getting a Jumbo loan. Lenders frequently urge Jumbo loan customers to show that they have enough financial reserves to pay a year’s worth of mortgage payments.
  4. Documentation: You’ll need a few more documents to verify your financial stability, usually more than for a conforming loan. When applying, be prepared to provide your complete tax returns, W-2s, and 1099s, as well as bank records and details on any investment accounts.
  5. Appraisals: A second home appraisal may be required by some Lenders for the property you’re trying to buy.
 

What are the Jumbo loan requirements?

Some Lenders divide their requirements by loan type, so if you’re purchasing a home, refinancing, buying an investment property, or completing a cash-out refinance, you’ll need to fulfill different standards.

The requirements for a jumbo loan can vary substantially depending on the Lender you choose. Here are some common examples of each type’s requirements:

Home purchase Jumbo loan

  • For residences under $1.5 million, a 10% down payment is required; for homes exceeding $1.5 million, usually a larger down payment is required (possibly higher for first-time homebuyers).
  • Depending on your down payment, a minimum credit score of 680 to 720 is required.
  • Max DTI: 40% but can be higher.
 

Refinance Jumbo loan

  • Required equity: The maximum loan to value is usually around 80% on a refinance.
  • 680 is the minimum credit score.
  • Max DTI: 43%
 

Cash-out refinance Jumbo loan

  • Equity is required in the range of 20% to 30%.
  • Cash out: Depends on the loan to value and property use.
  • Loan amounts range from $1 million to $2 million.
 

Investment properties Jumbo loan

  • A 20% down payment is required as a minimum.
  • Maximum loan amount: up to $3 million.
  • Credit score minimum: 720 to 760.
  • Max DTI: 43%

 

How are Jumbo mortgage rates set?

Due to the fact that Jumbo loans are larger loan amounts, many times the rate is higher than conforming loans.  However, that isn’t always the case.  Jumbo loan rates can vary significantly based on your lender, circumstances, and down payment.  Some mortgage lenders in Greenville SC may choose to offer rates that are comparable to or even lower than conforming loan rates when mortgages are perceived as posing less risk.

Because of the wide range of Jumbo loan rates, it’s even more crucial to shop around before deciding on a Lender.  Rates can vary by as much as .5% between Lenders.

Is it a good idea to get a jumbo loan?

Your Lender may suggest a Jumbo loan for your home loan, but this isn’t necessarily the most cost-effective alternative. If you are close to the conforming loan limit, it might be a good idea to put more money down or obtain a second mortgage to keep your loan around the conforming loan limit for your area. 

If that isn’t an option, make sure your credit score is in the mid-700’s, you have the appropriate down payment, and your debt-to-income ratios are under the allowable limit.

Consider these factors when considering a Jumbo loan:

1. Less lenders to choose from

Since Jumbo loans are not guaranteed by Fannie Mae or Freddie Mac, there are fewer Lenders who will lend for Jumbo Loans.  When there are fewer Lenders to choose from, the rate is usually affected in a negative way.  Jumbo loans are considered to be riskier for Lenders due to the larger loan amount, which also can have an impact on rate. 

2. Jumbo loans are pricier

As discussed above, with fewer Lenders to select from, borrowers will normally be subjected to higher interest rates.  Rates on Jumbo loans are typically between .25% and .5% higher than conventional loans. When it comes to larger loan amounts, even a fraction of a percentage point makes a difference.

3. A Jumbo loan isn’t easy to get

As if the home-buying process wasn’t stressful enough, getting a Jumbo loan may come with additional conditions that must be satisfied before the loan can be approved. Lenders also may require two Appraisals because the values of higher-end homes are more subjective. Obtaining two appraisals will ensure the two separate Appraisers were similar in their value determination.

Other items that may make obtaining a Jumbo more difficult are the tighter lending guidelines, such as lower debt to income ratios, higher reserve requirements, and larger down payments.  However, talk with an experienced Loan Officer to help determine if you are eligible for a Jumbo loan.

 

Jumbo Loan FAQs

What is the disadvantage of a jumbo loan?

Closing fees on jumbo mortgages are frequently greater than on conforming mortgages. Additionally, the rates are slightly higher and the best option may be an Adjustable-Rate Mortgage (ARM).  ARM’s are common during increasing rate environments and rates can be significantly lower than a fixed rate.

Is it hard to get a Jumbo loan?

A Jumbo loan is a loan that exceeds the FHFA’s borrowing limit for conventional mortgages. To qualify for a Jumbo loan, you’ll need to meet more stringent conditions, including a larger down payment.  A Jumbo loan can help you purchase a more expensive property, but there are certain things to consider before applying. Although each Lender has its own set of requirements for obtaining a Jumbo loan, the following are some basic recommendations to expect:

What credit score do you need for a Jumbo loan?

Lenders want to ensure you’re financially responsible before lending you hundreds of thousands of dollars. To qualify for a Jumbo loan, you’ll need a better credit score than you would for a conventional loan – typically at least 700. However, the higher your score, the better your rate.

What debt-to-income ratio is required for jumbo loans?

The monthly amount you pay toward debts divided by your gross monthly income is your debt-to-income ratio. If you pay $2,000 per month on your mortgage and student loan payments and earn $3,000 per month, your debt-to-income ratio is $2,000 divided by $3,000, or 66%.

Your specific debt-to-income ratio will vary depending on your Lender, but a Jumbo loan will certainly require a lower ratio than a conforming loan. Most people ask for a ratio of roughly 43% or lower, plus or minus a few percentage points. A lower ratio indicates that you owe substantially less than you earn, leading Lenders to feel you can handle the Jumbo loan’s hefty payments.

Are jumbo loan rates higher?

Your Jumbo loan rate will be determined by factors such as your credit score, down payment, and term length, just like a conforming loan. Jumbo loan rates, on the other hand, are often higher than conforming loan rates.

Because of the relatively big principal and the higher rate, you could end up paying a significant amount of interest over time. This isn’t to say you shouldn’t take out a Jumbo loan – it’s just something to think about.

How much do you need to put down for a Jumbo loan?

As a general rule, you should plan to put down at least 10% on a Jumbo loan. Some Lenders may ask for a down payment of 20% of the purchase price. While a 20% down payment is a decent starting point, it’s always a good idea to discuss all of your choices with your Lender.

Can you get a Jumbo loan with 5% down?

Jumbo loans are now available from some mortgage lenders with as little as 5 or 10 percent down. Others may require 15 to 20 percent.

Can you convert conventional to Jumbo?

No, because they are two completely different loan types. They only way to convert is to refinace and put more money down so the loan amount is within the limit.

Do Jumbo loans have PMI?

Often, you will not have to pay PMI on Jumbo loans, as they usually require a higher down payment. PMI is designed for home buyers who make low down payments. However, since the down payment requirement will vary by lender, it is possible that your lender will require PMI in exchange for a lower down payment.

How long does it take to close a Jumbo loan?

Jumbo loans can typically be closed in 30 to 45 days.

Can you put 10 percent down on a Jumbo loan?

As a general rule of thumb, you can expect to make a down payment of at least 10% on your Jumbo loan. Some lenders may require a minimum down payment of 20% or more, but 10% is usually possible.

What is the maximum debt to income ratio for a Jumbo loan?

The maximum debt to income limit for Jumbo loans is usually around 43% but can vary.

What is the Jumbo loan limit for 2022?

The Federal Housing Finance Agency (FHFA) announced that conventional loan limits are increasing. The new 2022 base loan limit in most of the country will be $625,000.

Do you have to have 20% down on a Jumbo loan?

Although Jumbo loans typically require a larger down payment, 20% is usually not the minimum. Many Lenders will allow around 10% down. You may need a higher down payment for second homes and multifamily units.

 

What is the difference between a conforming and Jumbo loan?

Jumbo loans live up to their name by offering a limit much higher than that placed on conforming loans. While conforming loans are created for the average homebuyer, Jumbo loans are designed for high-income earners looking to purchase more expensive properties.

Is a Jumbo loan a bad idea?

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.

Are Jumbo mortgage rates higher?

Obtaining a Jumbo mortgage doesn’t immediately mean higher interest rates. In fact, Jumbo mortgage rates are often competitive and can be similar to conforming mortgage rates. Factors like your credit score, down payment, cash assets and income can impact the interest rate you’re offered.

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