What Is a Jumbo Loan? Know Your Limits.
Thinking about purchasing a home in a highly desirable location? If so, you may find that the price of the home exceeds the borrowing limits set forth by the Federal Housing Finance Agency (FHFA). In 2023, the FHFA conventional loan limit is $726,200. This limit applies to most counties across the United States, and it means that a homebuyer cannot take out a mortgage higher than that amount.
What if you have your sights set on a home but the loan will fall outside of those limits? In that case, a jumbo loan can help. What is a jumbo loan and how does it work?
In this post, we’re sharing the ins and outs you need to know. We’ll cover how these loans work, the risks to understand, and the basic requirements you’ll need to meet to qualify for one.
How Jumbo Home Loans Work
If a homebuyer wishes to purchase a home, but the mortgage exceeds the local conforming loan limit, then they may be interested in pursuing a jumbo loan. Specifically, a “high-cost home” is one in which 115% of the local median home value is more than the conventional loan limit ($726,200). While this financing option can open up a world of possibilities for a qualifying buyer, it’s riskier on the lender’s part. This is because jumbo home loans are not guaranteed by a federally-backed home mortgage company, such as Fannie Mae or Freddie Mac. If a borrower defaults on a jumbo loan, the lender is not protected from shouldering that loss.
Depending on the lender, jumbo loans may require a fixed interest rate, or they might come with an adjustable rate. There are also myriad different terms that the borrower must follow.
Qualifying for a Jumbo Loan
As jumbo loans are riskier for banks, lenders are very selective about who they allow to enter into this type of loan. Let’s take a look at a few of the terms you’ll need to meet.
Credit Scores
Most of the time, you will need a very good credit score of at least 680 or above to even begin the qualifying process for a jumbo loan. While some lenders might allow your score to dip as low as 660, most look for numbers closer to 700 or above. Conversely, to qualify for a conforming 30-year loan, you’ll usually need to show a credit score of just 620.
For many borrowers, this is the most restrictive term. Credit scores can take a while to build up this high, even if you have a fairly solid credit history. Thankfully, there are a few ways to build your credit score fast.
You can start by paying down your revolving credit balances, checking your credit report for critical errors, and increasing your credit limit. Here are a few more tips to help you get your score where you need it to be as quickly as possible.
Debt-to-Income Ratio
Your lender will also require evidence of your debt-to-income (DTI) ratio, to ensure that you can handle the financial responsibility of such a large loan. This helps them guarantee that you won’t become over-leveraged and unable to pay back your loan amount.
Some lenders will be flexible with their DTI requirements, especially if you can provide evidence that your cash reserves are healthy. However, others will cap their DTI limits at 45%.
Does your current DTI exceed that amount? There are ways to lower it over time. Here’s a helpful guide from Experian, one of the top consumer credit reporting bureaus in the nation.
Proof of Income
In addition, you will need to provide proof that you have a steady, high income. This demonstrates to your lender that you have a reliable stream of money coming in each month, and you’ll be able to pay back your jumbo loan amount in a timely manner.
Cash Reserves
It can be nearly impossible to qualify for a jumbo loan if you’re living paycheck-to-paycheck. Lenders want to see that you have plentiful cash reserves on hand and have the means to cover the high cost of your monthly mortgage. Some lenders may even require that you have enough savings to cover one year of mortgage payments on your jumbo loan.
Documents to Gather
Your lender may require bank statements or check stubs to verify your employment and check your cash stores. If you can provide proof of your financial health and stability, then you may be able to benefit from lower interest rates and more favorable terms from your jumbo loan lender.
It’s smart to go ahead and assemble all of those required documents ahead of time, before meeting with a prospective lender. This way, you can make sure that all of the important forms are ready, which can improve your likelihood of receiving a favorable loan decision. The most important documents to gather include:
- Your W-2 or 1099 forms
- Your pay stubs
- Your most recent bank statements
- Statements from any other investment accounts
- Your complete tax forms for 2-3 years
Jumbo Loan Requirements
It’s important to understand that each lender is different, and impart their own rules and regulations concerning the distribution and management of a jumbo loan. Still, there are some commonalities that are general across the board.
The first relates to down payments. Most jumbo loans will require a larger down payment, even one that exceeds the industry standard of 20%. While the minimum down payment required on a conventional mortgage is 3%, it’s usually 10% for a jumbo loan.
In addition, you may also be required to pay for an additional appraisal on the property you’re eyeing. The lender might want to verify that the home is truly worth the high amount that the seller is asking for it. If the agreement does go through and it’s time to close, keep in mind that you may also be required to pay extra closing costs to cover the fees associated with this type of transaction.
Jumbo Loan Rates
Again, jumbo loan rates are not universally set. Rather, each individual lender will set those terms and limits and explain them to interested buyers. You can find both fixed-rate jumbo mortgages, as well as adjustable-rate ones. Most fixed-rate jumbo mortgages are available in either 15-year or 30-year terms, though it will vary by the type of loan you receive.
An adjustable-rate jumbo mortgage, for instance, can be available in terms that vary from five to seven to 10 years. If you ever need to refinance this type of loan, you can do so just as you would a conventional loan. This means you can pursue a cash-out refinance, or a standard rate-and-term refinance as required.
Current Market Trends
As you might expect, jumbo loans usually come with higher interest rates. This is simply because the amount that you’re borrowing is higher than a conventional loan. However, it appears that this trend might be somewhat reversing.
In early 2022, loan rates started to rise. In response, jumbo loan rates lowered below the rates for conforming loans. Around the time of this writing, the average rate on a conforming 30-year mortgage is hovering around 5.27%, while the rate for a 30-year fixed-rate jumbo mortgage is 4.91%. Depending on how the markets are performing, sometimes Jumbo Loans can have a slightly lower rate than that of other conventional loans.
Much of these trends can be attributed to the housing frenzy that’s currently sweeping the country. Catalyzed by the pandemic and fueled by the continued state of the economy, this craze doesn’t show any sign of slowing down. Now more than ever, if you’re interested in purchasing an expensive home in a desirable area, then a jumbo loan may be a more financially sound way to do so.
Comparing Rates
Ready to move forward? Before you sign on any dotted line, shop around! Look for the best jumbo loan interest rates in your area, just as you would do with a conventional mortgage.
By researching and comparing different lenders, you can choose the one that best fits your needs and budget. This process also helps you understand which lender has the lowest rates, and what the terms of each agreement include.
If you’re moving to a desirable area with higher-than-average median home prices, a jumbo loan may be the only way you can qualify for a property in your area.
However, it’s important to know the basics behind the question, “What is a jumbo loan?” Talk to your lender to make sure you understand everything that’s required and only take the next step when you’re ready to do so.
In the meantime, we can help you find the property of your dreams, right here in the Triangle. Take a look at our available homes, and get in touch to learn more.
Additional Resources
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