Everything You Need to Know About Jumbo Loans Before You Borrow Big
Financing your dream home can come with extra hurdles if it comes with a big price tag – a jumbo loan might be just what you need to make it a reality. If you live in a high-cost-of-living area or just enjoy the finer things in life, you’re not alone. In 2022, 22.7% of residential single-family mortgages were jumbo loans.
In this article, we’ll be going over everything you need to know about jumbo loans – from conforming loan limits to how to get one. Let’s dive into it!
What Is a Jumbo Loan?
A jumbo loan is a type of mortgage that’s designed to finance properties that exceed the conforming loan limits set by the Federal Housing Finance Agency (FHFA). Any mortgage amount above these limits is considered a jumbo loan. It’s really just a blg or “jumbo” loan – hence the name.
Since jumbo loans don’t follow conforming loan limits, they fall into the non-conforming loan category. These limits vary by location, with higher limits in high-cost-of-living areas – we’ll be covering more on conforming loan limits later on in this article.
Jumbo loans are typically used for buying luxury homes or properties in highly competitive real estate markets where average home prices tend to surpass these loan limits. It’s important to note that jumbo loan requirements and terms can vary among lenders, so it’s advisable for borrowers to shop around and compare offers from multiple lenders to find the best rates and terms for their specific situation.
How Do Jumbo Loans Work?
Because jumbo loans exceed the conforming loan limit, they’re too large to be sold to Fannie Mae or Freddie Mac, also known as the secondary mortgage market. This ultimately results in the lender taking on more risk for these loans. For borrowers, this usually means higher down payments and potentially higher interest rates.
In terms of the way the loan is structured, it’s very similar to a conventional loan, but don’t be mistaken, the two aren’t the same. Jumbo loan interest rates are typically higher than rates for conforming loans. This is because jumbo loans can carry more risk for lenders. We’ll get more into that below. And when it comes to rates, jumbo loans are typically offered as either fixed-rate or adjustable-rate with a variety of terms and repayment schedules.
What Are Conforming Loan Limits?
Conforming loan limits are the maximum loan amount that government-sponsored entities (GSEs) like Fannie Mae and Freddie Mac are willing to purchase from lenders. With conventional loans that are within the conforming limits, lenders can sell the mortgages to Fannie and Freddie to reduce the level of risk that they’re taking on. Loans that exceed the limits, like jumbo loans, are non-conforming loans.
These limits are reviewed and adjusted every year by the FHFA and vary by location, reflecting the different housing markets across the country. Generally, the conforming loan limits start at $766,550, but can be as high as $1,149,825 in high-cost counties. The higher limits in certain areas ensure affordability and accessibility in expensive areas.
While these limits may sound high to some people, for others, it can be challenging to find their dream home with these price caps. Jumbo loans can be a lifeline, offering a solution for borrowers looking to take out a home loan for a larger primary residence, vacation home, or even an investment property.
Who Would Benefit From a Jumbo Loan?
Simply put, anyone who is looking to finance a home that has a purchase price exceeding the conforming loan limits would benefit from a jumbo loan. This includes, but is not limited to:
- Homebuyers in expensive markets
- Luxury homebuyers
- High-income earners
- High-net-worth individuals
- Second home/vacation homebuyers
- Real estate investors
- Individuals looking to refinance a high-value property
- Individuals looking for customized and flexible loan solutions
Jumbo Loans vs. Conforming Loans: What’s the Difference?
The main difference between jumbo loans and conforming loans is the maximum loan amount that’s permitted.
Jumbo loans exceed the FHFA conforming loan limits, which is capped at around $766,550 in most areas as of 2024. These loans allow you to buy more expensive properties, but can often come with more strict qualification requirements. Due to the size of jumbo loans and the fact that they can’t be sold to Frannie Mae and Freddie Mac, lenders need to ensure that you’ll be able to repay the loan. For jumbo loans, lenders usually require a higher minimum credit score, a larger down payment, and may even charge slightly higher interest rates.
On the other hand, conforming loans adhere to the FHFA conforming loan limits. By staying within these limits, lenders can sell them to Fannie Mae and Freddie Mac to reduce their risk. This makes the vetting process a bit easier for lenders offering conforming loans, resulting in slightly less strict requirements than jumbo loans.
Jumbo Loan Qualification Requirements
The qualification requirements for jumbo loans vary by lender since each lender sets their own criteria and limits. Generally, you’ll need:
- Loan amount surpassing conforming loan limits in your county
- Minimum FICO score of 700+
- Maximum debt-to-income (DTI) ratio of 43%, but ideally less than 35%
- Down payment of anywhere between 10-25%
- Cash reserves to cover between six to 12 months of mortgage payments
- Documentation required usually includes tax returns, W2s, 1099s, bank statements, and investment statements
For specific requirements, we recommend reaching out to lenders directly, so you know what you’ll need to qualify.
How to Get a Jumbo Loan
While jumbo loans open the door to properties with bigger price tags, securing one requires careful planning and preparation, just like with any home purchase. Below, we’ve outlined the steps you can take to easily navigate the process:
- Evaluate Your Finances
Before jumping in, evaluate your current finances. Jumbo loan lenders typically look for credit scores that are over 700, but having an even higher score than that can help you secure lower interest rates. On top of that, having a down payment of at least 20% is ideal. Some lenders may allow down payments as low as 10%, but having 20% or more set aside make the closing process much smoother.
- Gather Documents
Put together the documents you’ll need to verify your income, assets, and employment history. Some documents you may need include tax returns, W2s, 1099s, bank statements, and investment statements. Gathering your documents early on in the process can help speed up the approval process.
- Shop for a Lender
Research different lenders and compare their rates and terms. Jumbo loans are not one-size-fits-all, so finding a lender that specializes in jumbo loans can help you during your home buying journey. Consider private mortgage lenders, like Defy, since they typically handle alternative mortgages.
- Request a Pre-Approval
Once you’ve selected a lender or two, request a pre-approval. Having a pre-approval allows you to shop within a budget and be aware of the terms and conditions of the loan. This helps you focus your home search within a realistic maximum budget.
- Find Your Dream Home
After getting a pre-approval, here comes the fun part! You can begin searching for your dream home. While a pre-approval gives you an idea of the upper limit of your budget, remember that if you end up finding a home that’s below the conforming loan limits, a jumbo loan may not be necessary.
- Formal Application
When you find your perfect home and an offer is accepted, a formal loan application will need to be submitted with your chosen lender. This step involves a more in-depth look into your finances and the appraised value of the property.
- Closing
After the lender reviews all of your finances and approves your loan, you’ll schedule a closing day. The mortgage closing process involves completing any remaining paperwork and paying all necessary fees and the down payment.
- Enjoy Your New Home!
Congratulations on your new home! Closing day is typically the last step of the buying process and it’s the day that the home officially becomes yours. After closing day, you’ll be expected to make monthly mortgage payments to your lender on an agreed-upon date.
Keep in mind that these are general guidelines and each lender may have additional steps or requirements.
Pros and Cons of Jumbo Loans
With such a large purchase, it’s important to evaluate the benefits and drawbacks. Here are some pros and cons to consider before getting a jumbo loan:
Pros:
- Larger loan amounts
- Opportunity to finance your dream home or investment property
- Competitive interest rates for borrowers with strong qualifications
- Flexible loan terms depending on the lender
- Faster approval process
Cons:
- Limited availability
- Potentially higher closing costs due to the higher loan amount
- Often stricter qualification requirements than conventional loans
Jumbo Loan Alternatives
Since jumbo loans have rather strict qualification requirements, it may not be for everyone. However, you might be wondering what your options are besides a jumbo loan if you have a larger loan amount. Luckily, there are plenty of non-QM loan (non-qualified mortgage) options that have loan maximums that are beyond the conforming limits. These loans are much more flexible with their qualification requirements since they’re not required to follow the strict lending standards set by the Consumer Financial Protection Bureau (CFPB).
Although we do offer jumbo loans, here are some alternative non-QM loan options that we offer at Defy:
- Bank Statement Loans: Use your personal or business bank statements to qualify rather than traditional income documents like pay stubs, W2s, and tax returns. Lower credit score required (620+) with a maximum loan amount of $6 million.
- Profit & Loss (P&L) Loans: Use your business’ P&L statements to qualify rather than traditional income documents. A minimum credit score of 600+ (with reduced LTV) required with a maximum loan amount of $6 million.
- Debt-Service Coverage Ratio (DSCR) Loan: Use your property’s rental income to qualify if you’re a real estate investor or are looking to expand your investment portfolio. A minimum credit score of 620+ is required with no maximum loan amount.
- Asset Depletion Loan: Use your liquid assets to qualify if you have a substantial liquid asset portfolio. This includes assets held in bank accounts, savings accounts, investment accounts, and retirement accounts. A minimum credit score of 620+ is required with no maximum loan amount.
Beyond these alternative non-QM loan options, some other strategies to finance a more expensive property are:
- Saving Up for a Bigger Down Payment: Having a bigger down payment can help you qualify for a jumbo loan since lenders typically require between 10-25%. Since more expensive properties will require a larger down payment amount, think about taking some extra time to save up.
- Unlocking Home Equity: If you have an existing property with a significant amount of home equity, consider unlocking your home equity to help finance the next one. Besides selling your existing property, think about getting a cash-out refinance, HELOC, or home equity loan.
Shopping for the perfect loan doesn’t have to be difficult. Defy can help you choose the right loan for you – we have all of the loan options listed above and more. Contact us for a personalized consultation and let us put in the legwork for you!
Jumbo Loan FAQs:
- What is a jumbo loan?
A jumbo loan is a type of mortgage that exceeds the conforming loan limit set by the FHFA for a specific area.
- How do jumbo loans work?
Jumbo loans work similarly to a typical mortgage, but since the lender can’t sell them on the secondary mortgage market (Fannie Mae and Freddie Mac), they take on more risk. This often results in stricter requirements, so the lender can make sure you have the ability to repay the loan.
- How do conforming loan limits work?
Conforming loan limits are the maximum loan amounts that Fannie Mae and Freddie Mac are willing to buy from lenders. These limits are reviewed and adjusted every year and vary depending on location, with higher limits in areas with high cost-of-living.
- When does a jumbo loan start?
Jumbo loan limits depend on your location, but in most counties in 2024, they start at $766,550. If you’re buying a home in a high-cost county, it can be as high as $1,149,825. We recommend checking the FHFA’s conforming loan limit list by county for the most accurate and up-to-date information.
- What are jumbo loan limits?
Jumbo loan limits vary depending on the lender. Some lenders may cap the loan at $2 million, whereas others may be willing to lend up to $10 million. There’s typically no hard limit across the jumbo loan industry and it’s solely up to the lender’s discretion.
- Are jumbo loan interest rates higher?
Not necessarily. Jumbo loan interest rates can either be higher or lower than standard mortgage rates depending on the current market rate and your credit score. Despite being riskier than conventional loans for the lender, some of them may be willing to offset your interest rate if you have a strong credit score.
- What are jumbo loan requirements?
Jumbo loan requirements vary by lender, but they’re typically a bit more strict than conventional loan requirements due to the size of the loan. Generally, you can expect these requirements:
- Loan amount surpassing conforming loan limits in your county
- Minimum FICO score of 700+
- Maximum debt-to-income (DTI) ratio of 43%, but ideally less than 35%
- Down payment of anywhere between 10-25%
- Cash reserves to cover between six to 12 months of mortgage payments
- Documentation required usually includes tax returns, W2s, 1099s, bank statements, and investment statements
- Can a jumbo loan be assumed?
Yes, a jumbo loan can be assumed by a qualified buyer as long as the lender approves of it.
- Is a jumbo loan a conventional loan?
No, a jumbo loan is not a conventional loan. Conventional loans are within the conforming loan limits established by the FHFA and jumbo loans surpass that limit.
- Is a jumbo loan more expensive?
Jumbo loans can potentially be more expensive depending on the interest rate. They typically require higher minimum down payments as well, meaning more cash is needed at the time of closing.
- Can I get a jumbo loan without 20% down?
Yes, it’s possible to get a jumbo loan with less than 20% down depending on the lender, the property, and your borrower profile.
- What are the down payment requirements for a jumbo loan?
Jumbo loan down payment requirements usually range between 10-25% of the home’s purchase price.
- How much jumbo loan can you afford?
The amount of jumbo loan you can afford depends on your income, debt-to-income (DTI) ratio, credit score, and the interest rate offered. Using a mortgage calculator can help you determine your maximum loan amount.
- What is the minimum down payment for a jumbo loan?
The lowest minimum down payment for jumbo loans is typically 10%. However, these requirements vary by lender.
- What credit score do I need for a jumbo loan?
The minimum credit score required for a jumbo loan is usually 700. Though, some lenders may require an even higher minimum credit score, such as 740 to 760.
- Does Defy Mortgage offer jumbo loans?
Yes, we do! Our team at Defy is here to walk you through the whole purchase process with total confidence. No sweat. Check out your loan options with us!
