What is a Jumbo Loan?
If you are a homebuyer and would like to purchase a house in a particularly high-priced area or if the home of your dreams is more expensive than what a traditional mortgage can finance, then a Jumbo loan might be a valuable choice for you. Jumbo loans are for homebuyers who need to borrow more with fewer restrictions. They are higher than traditional loans, exceeding the limits set by the Federal Housing Finance Agency (FHFA).
Sometimes traditional loans aren’t enough to buy the home you really want. Jumbo loans were created to allow homebuyers to borrow beyond the conforming loan limits set by Fannie Mae and Freddie Mac. For 2023, the conforming loan limit is $726,200 across most of the country. The loan limit can change by state and it goes up to $1,089,300 in some high-cost areas. Jumbo loans and Super Jumbo loans are non-conforming loans designed to offer the flexibility of borrowing with fewer restrictions.
Jumbo Loan Benefits
Jumbo loans can be particularly helpful to people who are shopping for a home in a higher priced area of the country. There are also several options to choose from depending upon your qualifications. Jumbo loans come with many benefits including:
- Flexible terms: Jumbo loans generally have flexible terms for how much money you can borrow and what types of properties you can finance.
- Co-borrowers allowed: Jumbo loans allow for a co-signer who will not be living at the property to sign the loan agreement with the borrower.
- Fixed-rate and adjustable-rate programs available: You can get a Jumbo loan as a fixed-rate or an adjustable-rate mortgage. This gives you flexibility in your monthly payments and the length of the loan.
- More money: Jumbo loans are designed for buyers who need higher amounts of cash. Each lender has their own limitations to how much you can borrow.
- Available for multiple property types: Jumbo loans can be used to finance your primary residence, an investment property, or a vacation house. The exception to this is the VA Jumbo loan, which can only be used for your primary residence.
Jumbo Loan Requirements
Because Jumbo loans deal with larger amounts of money, the standards for qualification are generally stricter than for other loans. They include:
- Property requirements: Jumbo loans have their own property requirements and your lender may require an appraisal for loan approval. However, unlike some other loans, you can use a Jumbo loan for more than just a primary residence. You can use a Jumbo loan for an investment property or vacation home as well.
- Minimum of 10% down payment: Because Jumbo loans are for higher amounts, their down payment requirements are often higher as well. However, as with Conventional loans, if you put down less than 20% as a down payment you may be required to have private mortgage insurance.
- Minimum of 680 credit score: A credit score of up to 740 may be required by lenders for certain loan types.
- Maximum debt-to-income ratio of 45%: Lenders may go as high as 50% if other conditions are met.
- Cash reserves: Because Jumbo loans are for larger amounts and lenders aren't as protected as with conforming loans, they will want to see that you have enough reserve money to cover at least six months’ worth of mortgage payments. For some loans, they will require up to a year’s worth of payments.
- Proof of high, consistent income: In the same way lenders will want to see cash reserves because the Jumbo loan amounts are so high, they will also want to see a high, consistent income. Lenders will expect you to show two years’ worth of documentation proving your income as well as any liquid assets you have at your disposal. This can include information on your taxes and how long you've been employed.
- Private Mortgage Insurance (PMI): PMI is a type of insurance that the borrower pays in order to secure a mortgage if they don’t have a high enough down payment. Since Jumbo loans are not backed by the government or Fannie Mae and Freddie Mac, they are considered riskier to lenders. PMI is paid to mortgage insurance companies to give the lender some protection in case the borrower defaults on their loan. If you put down more than 20% as a down payment, you will not be required to have PMI.
- Loan-to-value ratio (LTV): LTV expresses the ratio of a loan to the value of an asset purchased. So, were you to purchase a home with an appraised value of $100,000, and put down 20% of the purchase price, your LTV would be 80. This LTV ratio will like as expressed as 80/20. Jumbo loans often allow for a max LTV of 80%.
In addition to these requirements, all lenders have their own unique set of applicable qualifications for loan approval. These requirements will be stated in your agreement. The loan officers at New American Funding will be happy to answer any questions you may have and help you find the right loan to suit your individual’s needs. Contact us using our website or in person at one of our many branches.
How Does a Jumbo Home Loan Work?
Jumbo loans follow their own set of guidelines and are considered non-conforming. These loans exceed the loan limit set by the government. They do not meet the loan requirements for Fannie Mae and Freddie Mac and they are not bought by them. Instead, non-conforming loans are funded by private lenders. Since they are less standardized, and not governed by a federal agency like other loans, the features of the loan agreement can change greatly from lender to lender.
How Are Jumbo Mortgages Treated Differently?
Jumbo mortgages are different than traditional loans in that they may have higher interest rates and stricter guidelines than traditional loans. Since they are usually not backed by the government, lenders find ways to offset the risk of lending large amounts of money without a guarantee.
Qualifying for a Jumbo Loan
In order to qualify for a Jumbo loan, you must meet the above requirements as well as fulfill any individual qualifications your lender may have. Because Jumbo loans are nonconforming, they don’t have one strict set of requirements. Credit scores, DTIs, and income requirements will vary by both lender and loan product.
This means that the first step in qualifying for a Jumbo loan will be looking for and finding a lender to discuss which products are right for your individual needs. They will help you find out if you qualify and will be happy to walk you through the application process.
Jumbo loans vs. Conforming loans
Conforming loans are standardized and conform to the rules set by Fannie Mae or Freddie Mac. The main difference between non-conforming loans and conforming loans is the loan limit. Conforming loans have maximum loan limits that they must adhere to. In 2023, the loan limit for a single-unit property is $726,200. This limit can be as much as $1,089,300 in high-cost regions. These loan limits are set by the Federal Housing Finance Agency and change each year based on nationwide home prices. Conforming loans may also have lower interest rates than Jumbo loans, though this is not always the case.
Jumbo loans exceed the loan limit placed by Fannie Mae and Freddie Mac. These are non-conforming loans. They cannot be sold to Fannie Mae and Freddie Mac. They are not limited by government requirements either. These loans are usually used for more expensive properties than those that fall below the Conforming loan limit. Jumbo loans typically have higher interest rates than conforming loans. They are more difficult to qualify for and are given out less frequently.
Can I Get a Jumbo Loan Refinance?
You can refinance a Jumbo loan. There is no time limit or equity requirement. However, the lender requirements for refinancing are usually stringent. The larger the loan the more risk to the lender and since Jumbo loans don’t always have mortgage insurance, lenders have higher standards for lending.
In order to refinance a Jumbo loan, you will need meet the terms of your individual loan. This can include a credit score of up to 760 for certain property types, a DTI of no more than 36%, and high enough cash reserves to pay for from six months to a year’s worth of mortgage payments.
Refinancing a Jumbo loan is also more complex than other types of refinances. Closing costs will be higher and the underwriting of the loan may be done manually. Since Jumbo loans are for such high amounts, their principal balance is higher. This means that their closing costs and associated fees will be more expensive than other traditional mortgages. The loan process can also take longer when the loan officer has to underwrite it manually.
Another refinancing option is to get a cash-out refinance. You can then use the money for investing, upgrading your property, or for other financial obligations.
Does the VA Offer Jumbo Loans?
Yes. The VA offers their own Jumbo loans for veterans. Eligible service members can use their VA benefits to obtain Jumbo loans with no down payment and no PMI.
The loan requirements for a Jumbo VA loan include:
- Service requirements: The service requirements for a Jumbo VA loan are the same as for a regular VA loan. They will include things like how long servicemembers have been active and the status of their discharge.
- 620 or higher credit score: Jumbo VA loans have higher credit score requirements than regular VA loans. The exact number will depend on your lender.
- Cash reserves: The amount of cash reserves needed for Jumbo VA loan approval will vary by lender.
- Entitlement: Your entitlement will affect how certain aspects of your loan are calculated. Whether you have partial entitlement or full entitlement could affect things like your down payment and your interest rates.
- Home appraisal: The VA has its own specific home appraisal process that you will have to go through to get qualified for a loan. It will determine the condition and eligibility of the property.
- Funding Fee: The VA funding fee is a payment that the borrower makes to the VA when the loan closes. There is often the option to roll it into the loan, or pay it off in full. It is a one-time fee, usually due at closing, that helps offset the taxpayer cost of VA loans. Not everyone has to pay the VA funding fee, so make sure to check with your lender. How much the funding fee is depends on your loan amount and other factors like your down payment amount.
- Property must be primary residence: In order to qualify for a VA Jumbo loan, you must meet the VA’s property requirements. VA Jumbo loans cannot be used for investment properties or vacation houses.
Jumbo VA loans can be a beneficial option for service members or their spouses. Since Jumbo loans are nonconforming, most lenders have their own set of requirements and qualifications. Make sure to check with your lender to see if you qualify for a Jumbo VA loan.
Pros and Cons of a Jumbo Loan
As with all loans, borrowers need to consider their unique situation and product holistically. Jumbo loans have some great benefits but may not be the right choice for everyone. Jumbo loans offer higher, more flexible lending amounts and are available for many different types of properties. You can also refinance Jumbo loans for cash.
However, because they are larger loans, they also come with higher closing costs and potentially higher interest rates and down payments. Be sure to talk to your individual lender or banker about these because interest rates are competitive, so they will fluctuate and could, potentially, be lower depending on the market.
Jumbo Loan FAQs
What is considered a Jumbo mortgage?
A Jumbo loan is any loan amount that is over the limits set by Fannie Mae and Freddie Mac. For 2023, the loan limit is $726,200 for a single-family home in most states in the United States.
Do you have to put 20% down on a Jumbo mortgage?
Some lenders may allow you to put down as little as 10-15% on a Jumbo mortgage. However, this is dependent on many factors including your LTV, your assets, and the property. For instance, investment properties and second homes might require a larger down payment than if you are borrowing to finance your primary residence.
Do Jumbo loans require PMI?
Jumbo loans are like Conventional loans. They require private mortgage insurance (PMI) if you put down less than 20% as a down payment.