How it Works
A jumbo loan is a mortgage that goes above what the Federal Housing Finance Agency has set for conforming loan limits. A conforming loan limit is the max dollar amount that Freddie Mac and Fannie Mae will guarantee, and these limits are set on a yearly basis to account for changes in the market. For example, the 2023 conforming loan limits range from $715,000 to $1,073,000.
These loan limits will vary depending on the location and cost of housing in that given area. That's where jumbo loans come in. These loans make it possible for individuals to purchase a home in an extremely expensive housing market. Jumbo loans are also used by those looking to make luxury or high-end home purchases exceeding the conforming loan limits set for that area.
As a result, this means you can afford a more expensive home! However, with home values increasing, you may find yourself in need of a larger loan amount. That's where a jumbo mortgage comes in. If your required loan amount is even $1 over your area's Federal Housing Finance Agency (FHFA) conforming loan limit, a jumbo loan (or non-conforming loan) is needed.
A jumbo loan may be for you if you have:
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Two years of steady employment (preferably with the same employer)
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A minimum credit score of 680 or higher
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Monthly debt that does not exceed 40% of your monthly income
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Substantial assets and cash reserves
What is a jumbo loan?
As a general rule, conforming loans are sold to Freddie Mac and Fannie Mae and must meet the required loan limits. Anything outside those limits will require a jumbo loan through a private lender. Jumbo loans are an excellent option for those who don't have enough saved to put down a sizeable down payment or need a loan that does not meet conforming loan requirements.
There is no mortgage insurance requirement with a jumbo loan. Therefore a jumbo loan is often seen as a higher risk for lenders. As a result, jumbo loans tend to come with stricter borrower requirements than there are for conforming loans.
There are also strict credit score, tax, debt-to-income ratio, and underwriting requirements. The stringent requirements are in place because of the risk lenders take on with these loans. Since jumbo loans are outside of the conforming loan limits, the loan can't be purchased or guaranteed by Freddie Mac and Fannie Mae and therefore come with more hoops for the borrower to jump through.
How do jumbo mortgage loan rates differ from conforming loan rates?
Jumbo and conforming loans are financing options people use to purchase a home. The similarities include the fact that both types of loans have set borrower requirements such as minimum credit scores, down payments, debt-to-income ratios, documentation of earnings, and asset holdings to prove the ability to repay the loan. And that's pretty much where the similarities end.
Requirements for jumbo loans will be stricter due to the risk private lenders are taking to provide a loan not backed by Freddie Mac or Fannie Mae. So let's dig deeper into some of the most significant differences to look out for when considering your options.
Loan limits
Perhaps the most notable difference involves loan limits. The name jumbo says it all. The purpose of jumbo loans is to provide financing for high-ticket homes that exceed the conforming loan limits.
In most of the U.S., the average conforming loan limit is $715,000 for a single-family home. However, in high-cost living areas like Alaska, Hawaii, Washington D.C., Guam, and the U.S. Virgin Islands, the conforming loan limit tops out at $1,073,000. Anything outside of these limits falls under jumbo loan territory.
Loan rates
Interest rates tend to be higher for jumbo loans, although not as high as in the recent past. Having higher interest rates is a measure that helps lenders offset the high degree of risk involved with jumbo loans. Both conventional and jumbo loan rates fluctuate and are influenced by situations in the market as well as benchmarks determined by the Federal Reserve.
Borrower requirements
Stringent down payment requirements demand that the borrower pay 10% to as much as 30% down. On the other hand, conventional loan down payments vary depending on the loan type but average around 3% to 15%. In addition, higher credit scores are also required of jumbo loan borrowers as an additional safety measure for the lender.
In addition, most lenders require that the borrower provide proof that they have enough funds on hand that could cover a year's worth of homeownership expenses. On the other hand, conforming loans require about half that of jumbo loans. These measures are meant to ensure that the borrower has minimal debts and a substantial amount of liquid assets.
What do you need to qualify for a jumbo loan?
More rules are associated with jumbo loans because the loan amount and risk are higher for lenders. You will need to provide 30 days' worth of pay stubs and the past two years of tax returns for starters. For those who are self-employed, the requirements will be even more demanding.
In addition to the down payment, jumbo loans require that the borrower provides a record that they have cash on hand that could pay for an entire year's worth of homeowner expenses. Down payment requirements have eased in recent years and range from 10% to 30%, depending on the size and terms of the jumbo loan. Additionally, you'll need an excellent credit score of around 700 or more to qualify for a jumbo loan.
Your debt-to-income ratio will need to be below 43% and ideally closer to 36%. Even as a non-conforming loan, jumbos must meet the Consumer Financial Protection Bureau's guidelines for the lending system's terms and rules for what's considered a "qualified mortgage." There are also different requirements for different home types and amounts being borrowed.
For instance, you would need a credit score of 700 or higher, DTI less than 45%, and a down payment of 10% to qualify for a $2 million jumbo loan for a one-unit primary property. Different requirements for credit scores and down payments would most likely come with a loan amount above $2 million and depends on the property type.
What are the pros and cons of a jumbo loan?
Jumbo loans are an excellent option for those looking to purchase a home in an expensive zip code or for those who can afford luxury housing that conventional loans don't cover. However, you will want to weigh all of the pros and cons before deciding to go with a jumbo loan. In fact, in many areas of the U.S. where housing prices have been surging, like in Colorado, Phoenix, and Tampa, jumbo loans are increasingly necessary.
Advantages
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As little as 10% down with no mortgage insurance
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Competitive fixed and adjustable rates
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15, 20, and 30-year terms
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Finance a primary residence, a second home, even a vacation home
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Enjoy the convenience of one loan for the entire loan amount
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Refinance a jumbo loan and get up to $750,000 cashback
Disadvantages
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Higher monthly mortgage payments
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Need a high credit score
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Strict qualification requirements
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Jumbo loans are harder to qualify for
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Must have enough cash available in your account to cover up to an entire year's worth of mortgage payments
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Higher down payment requirements
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Higher closing costs
Can you refinance a jumbo loan?
While there aren't any specific rules on how long you must wait before refinancing your jumbo loan, it is an option. However, much like the application process for the original loan, you will have to meet strict requirements to qualify for a refinance. It can also be tricky finding a lender who is willing to do the refinance for you, which, once again, comes down to the risk involved for the lender.
Keep in mind that if you decide to refinance your jumbo loan, you may be required to have a higher credit score than the first time around. However, your debt-to-income ratio will still need to be low, perhaps as low as 36% in some cases. You'll also need to plan on having significant cash reserves or savings, of which the amount will wholly depend on your loan amount.
Don't forget that closing costs will still be a factor to contend with when refinancing your loan. Be sure to consider if you will be able to cut down your interest rate, save on monthly payments, or consolidate debt with a refinance. We advise talking with your lender about any questions you may have to eliminate any unnecessary surprises.
FAQ
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VA jumbo loans are available for active military members, veterans, and surviving spouses to qualify for. The restrictive requirements associated with typical VA loans also apply to VA jumbo loans. In addition, there are different levels of credit score and down payment minimums that the borrower must meet depending upon the loan amount and other factors.
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A jumbo loan might be right for you if you're looking to purchase a home in an area where homes exceed conforming loan limits. Or if you're family has outgrown your current home and the house that will fit your needs exceeds loan limits. There are many reasons why a jumbo loan might be the best or only option for you to pursue. However, it is best to take out a jumbo loan only if required and go the conventional loan route if and when possible.
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In the past, those who benefit have tended to be wealthy with unique needs exceeding what a standard loan can cover. In an ever-changing world, there are now even more ways that one can benefit from a jumbo loan. For example, these loans allow individuals to purchase larger homes that cost more than a conventional loan will guarantee. In addition, these loans often help those relocating to a new state where the cost of housing is drastically higher than they are accustomed to. In these instances, jumbo loans help purchase a home that isn't necessarily any fancier than their current home but exceeds the conventional loan limits.
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As a general rule, yes. While sharing similar requirement methods to conventional loans, jumbo loans are riskier for lenders to provide since the loan exceeds the guaranteed amount. Potential borrowers must satisfy strict income requirements, including having enough cash on hand to cover up to a year's worth of mortgage payments. Credit scores must be higher than a score necessary for a conventional loan. The borrower's earnings and tax reports must indicate that they can repay the loan amount. Additionally, the borrower must have an extremely low debt-to-income ratio to be eligible.
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They are increasingly becoming more popular, or necessary to be even more accurate. Precisely because the cost of housing has been skyrocketing over the past few years, especially in places like Colorado, Miami, and Hawaii. As a result, many around the U.S. have to apply for jumbo loans to afford homes in competitive markets. Historically, jumbo loans have been the loans that the wealthier subset have used to purchase larger, luxury homes in upscale neighborhoods. However, jumbo loans are increasingly popular with those moving to or living in highly competitive housing markets.
