Jumbo Loans

What Is A Jumbo Loan?

A jumbo loan is a mortgage used to finance properties that are too expensive for a conventional conforming loan. 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.

Also known as non-conforming conventional mortgages, jumbo loans are considered riskier for lenders. This is because these loans cannot 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 interest rate or an adjustable rate, and they come with a variety of terms.

Qualifying for a jumbo loan

Underwriting criteria for jumbo loans are stricter because the loans are larger and riskier for lenders.

Credit score

Lenders may require your FICO score to be higher than 700 and sometimes as high as 720 to qualify for a jumbo loan.

Appraisals

Some lenders may require a second home appraisal for the property you’re planning to purchase.

 

Cash reserves

You’re more likely to be approved for a jumbo loan if you have ample cash in the bank. It is not uncommon for lenders to ask jumbo loan borrowers to show they have enough cash reserves to cover one year of mortgage payments.

Debt-to-income ratio

To ensure you do not become over-leveraged, lenders will also consider your debt-to-income ratio (DTI). However, they may be more flexible if you have plentiful cash reserves. Some lenders have a hard cap of 45% DTI, however.

 

Documentation

You will need extensive documentation to prove your financial health, perhaps more than for a conforming loan. You should be prepared to hand over your full tax returns, W-2s, and 1099s when applying, in addition to bank statements and information on any investment accounts.

Jumbo loans vs. Conforming loans

The key difference between a jumbo mortgage and a conforming loan is the size of the loan. For a thorough look at the two and the pros and cons of each, read about the differences between conforming and non-conforming 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%.

Potentially higher interest rates

Depending on the lender and your financial situation, Jumbo mortgage rates may be slightly higher than those on conforming loans. However, many lenders can offer jumbo loan rates that are competitive with rates on conforming loans. Some may even offer slightly lower rates depending on market conditions, so make sure to shop around.

Higher closing costs and fees

Because jumbo loans are bigger and there are some extra qualifying steps, expect higher costs at the closing table.

Loan limits

The loan limit for conforming loans varies by county because some real estate markets are much pricier than others. For 2021, the conforming loan limit for one-unit homes in most counties nationwide is $548,250. However, in “high-cost areas,” especially in the Northeast and on the West Coast, conforming loan limits are expanded to $822,375 — and even higher in a few other places.

What are typical jumbo loan requirements?

Jumbo loans have different requirements compared to conforming loans. These include:

  • Credit score – The minimum credit score required for a jumbo loan depends on the mortgage lender but is usually at least 700. Conforming loan credit score minimums are typically 620 or 640.

  • DTI ratio – When it comes to DTI, the lower, the better, especially for a jumbo loan. Many lenders look for no higher than 43 percent.

  • Down payment – The minimum down payment on a jumbo loan also varies by lender. This is because there’s less of a secondary market for jumbo loans, and more of them are held in the lender’s portfolio, explains Greg McBride, CFA, Bankrate chief financial analyst. “This can mean a down payment higher than the traditional 20 percent and instead be at 25 percent or 30 percent, but some lenders offer programs that have lower down payment requirements,” McBride says.