One crucial aspect of the home-buying process involves determining the right type of mortgage that aligns best with your needs. Do you need a jumbo loan to buy your dream home? Here’s what you need to know.
What is a Jumbo Loan?
A jumbo loan, also known as a jumbo mortgage, is a type of home loan that exceeds the limits set by the Federal Housing Finance Agency (FHFA) for conventional conforming loans. These loan limits are established to help regulate the mortgage market and ensure that loans are available to a wide range of borrowers. A jumbo loan is called a non-conforming loan because it doesn’t conform to these limits.
The FHFA sets annual conforming loan limits based on median home prices in various areas. Loans that exceed these limits are considered jumbo loans. Because jumbo loans are not eligible for purchase by government-sponsored enterprises like Fannie Mae and Freddie Mac, they typically have different terms and requirements compared to conforming loans.
What are Conforming Loan Limits?
Fannie Mae and Freddie Mac establish thresholds, known as conforming loan limits, which determine the maximum amount for your mortgage. These limits differ from state to state and across various markets. As of 2023, in most areas of the country, the maximum loan amount for a single-family unit is set at $726,200.
Imagine you want to buy a house, and it costs $1.5 million. Most regular mortgages are designed for houses that cost less than this, like under $700,000. So, if you want to borrow money to buy this expensive house, you’ll need a jumbo loan.
To find out the conforming loan limits for your homebuying area, use this FHFA map.
What Makes Jumbo Loans Different from Other Loan Types?
A jumbo loan is like a big special mortgage for really expensive houses. Here’s what makes it special:
Big Borrowing: With a jumbo loan, you can borrow a lot of money, usually more than $700,000 or even a million dollars.
Strict Rules: Since you’re borrowing so much, banks are more careful. They want you to have a really good credit history and often ask for a big down payment, like 20% or more of the house price.
Different Interest Rates: Because it’s a riskier loan for the bank (due to the large amount), the interest rates for jumbo loans might be a bit higher compared to regular mortgages.
No Government Help: Regular mortgages can get support from government programs, but jumbo loans don’t get that help. They’re usually handled by private lenders.
How Do I Qualify for a Jumbo Loan?
To be considered for a Jumbo construction loan or to qualify for a Jumbo loan for a home purchase, prospective buyers must meet specific eligibility criteria. These requirements include:
Good Credit Score – Your credit score plays an important role in securing a jumbo mortgage. The specific credit score needed to qualify for a jumbo mortgage varies based on the lender and loan terms. For a 30-year fixed loan on primary residences, vacation homes, and investment properties, the minimum requirement is a 680 median FICO Score. However, this requirement can go up to 760 depending on the property type and your mortgage goals. For a 15-year fixed loan, the minimum credit score required is 740.
Steady Income – Lenders want to make sure you have a stable job or source of income that allows you to comfortably make the bigger monthly mortgage payments that come with a jumbo loan. Lenders typically look for a debt-to-income ratio (DTI) below 43%, although some may allow slightly higher ratios.
Big Down Payment – You’ll need a chunk of money saved up for the down payment, often around 20% or more of the home’s price. This shows the lender you’re serious and can handle the loan.
Cash Reserves – Lenders might ask you to have extra savings beyond the down payment to make sure you can still pay the mortgage if something unexpected happens, like losing your job. Many lenders may request jumbo loan applicants to have savings equivalent to 12 months of living expenses.
Property Value – The house you’re buying needs to be worth a lot of money to qualify for a jumbo loan. It’s like a special loan for expensive homes.
Paperwork – Be ready to provide lots of financial paperwork to prove your financial stability for a jumbo loan. This includes full tax returns, W-2s, 1099s, bank statements, and details about your investment accounts when applying.
Interest Rates – Expect the interest rates to be a bit higher than regular loans because jumbo loans are riskier for lenders, and it depends on the lender and your financial situation.
No Need for Mortgage Insurance – Unlike some smaller loans, you usually don’t need mortgage insurance with a jumbo loan, which can save you money. Instead, expect lenders to require you to have at least 6–24 months of cash reserves. The exact amount of minimum cash reserves needed depends on the total jumbo loan amount plus your credit, loan-to-value ratio, and debt-to-income ratio.
How to Apply for a Jumbo Loan?
Applying for a jumbo loan involves a process similar to applying for a standard mortgage but with some additional considerations due to the larger loan amount. Here are the general steps to apply for a jumbo loan:
- Prepare Your Finances:
- Check your credit report and credit score. Make sure they are in good shape.
- Review your financial situation, including your income, assets, and existing debts. Ensure you meet the lender’s criteria for a jumbo loan.
- Determine Your Budget:
- Calculate how much you can comfortably afford to borrow and repay each month, taking into account your down payment and other expenses.
- Choose a Lender:
- Research and compare different lenders who offer jumbo loans. Look at interest rates, fees, and customer reviews to find a reputable lender.
- Get Pre-Approved:
- Before house hunting, consider getting pre-approved for a jumbo loan. Pre-approval will give you a better idea of your borrowing capacity and make you a more attractive buyer to sellers.
- Find a Real Estate Agent:
- If you haven’t already, work with a real estate agent who specializes in luxury or high-value properties. They can help you find suitable homes within your budget.
- Choose a Property:
- Find the property you want to buy and have it appraised to determine its value.
- Complete the Loan Application:
- Contact your chosen lender and start the formal application process. You’ll need to provide personal and financial information, such as income documentation, bank statements, and tax returns.
- Wait for Approval:
- The lender will review your application, verify your information, and assess your creditworthiness. They may also order an appraisal of the property.
- Underwriting Process:
- The lender’s underwriting team will evaluate your application and determine if you meet their jumbo loan criteria. They may request additional documentation or clarification during this process.
- Receive Loan Approval:
- Once your application is approved, you’ll receive a loan commitment letter outlining the terms and conditions of the jumbo loan.
- Closing Process:
- Coordinate with your lender, real estate agent, and the seller to complete the necessary paperwork and finalize the loan details.
- Closing Day:
- Attend the closing meeting to sign the loan documents, pay any closing costs, and take ownership of the property.
It’s important to note that the specific requirements and processes for jumbo loans can vary between lenders. Therefore, it’s essential to communicate closely with your chosen lender throughout the application process and be prepared to provide any additional documentation or information they request. Working with an experienced mortgage broker or loan officer can also be helpful in navigating the jumbo loan application process.