What Is A Jumbo Loan?

A jumbo loan, or jumbo mortgage, is a type of home loan that exceeds the loan limits set by the Federal Housing Finance Agency (FHFA). Since these loans surpass the conforming loan limits, they are classified as non-conforming loans. As a result, jumbo loans are not backed by Fannie Mae or Freddie Mac, which leads to stricter borrower requirements and potentially higher interest rates.

Jumbo mortgages, like conventional loans, come in various terms and can be either fixed-rate or adjustable-rate. For instance, you might find jumbo loans with 15- or 30-year fixed rates, or a 7-year adjustable-rate mortgage (ARM), depending on the lender.

Jumbo Loans vs. Conventional Mortgages

Conventional mortgages, which follow conforming loan limits, are sold to investors like Fannie Mae and Freddie Mac. These agencies package loans into mortgage-backed securities to sell on the secondary market. Jumbo loans, however, exceed these limits and attract different investors. They cannot be bundled in the same way as conforming loans.

In 2024, the standard conforming loan limit is $766,550 for a single-family home in most parts of the U.S. However, in high-cost areas, such as certain counties in Alaska, Hawaii, and California, loan limits can reach as high as $1,149,825.

When Might You Need a Jumbo Loan?

If you’re purchasing a home in a high-cost real estate market where prices often exceed the conforming loan limits, a jumbo loan may be necessary. Many buyers in these regions, even those looking at modest homes, find that conforming loans aren’t enough to cover the full purchase price.

Due to increasing demand, lenders are more willing to offer jumbo mortgages. For example, some lenders provide 15-year and 30-year fixed-rate jumbo loans or a 7-year ARM, where the rate adjusts after the initial 7-year fixed period.

Jumbo Loan Rates

Although jumbo loans carry more risk for lenders, the interest rates can be surprisingly competitive. The difference between conforming and jumbo mortgage rates usually ranges from 0.25% to 1%. In some cases, jumbo loans may even offer lower rates than conforming loans.

Qualifying for a Jumbo Loan

Jumbo loans come with stricter eligibility criteria compared to conforming loans, including:

• Property Types:You can use a jumbo loan to purchase primary residences, vacation homes, and investment properties.
• Down Payment : Jumbo loans typically require a higher down payment. Many lenders ask for at least 20% down for single-family homes. Down payments for second homes or multi-family units might be even higher, depending on the loan amount and borrower’s credit score.
• Credit Score: A strong credit score is essential to qualify for a jumbo loan. Depending on the lender, you may need a minimum credit score of 680 to 740 or higher, especially for fixed-rate loans or ARMs.
• Debt-to-Income (DTI) Ratio: Your DTI ratio is a key factor. Most lenders require a DTI of 45% or lower, although a higher credit score or larger down payment may allow for some flexibility.

Additional Requirements for Jumbo Loans

Lenders offering jumbo loans often require the following:

• Cash Reserves: Jumbo loan applicants must prove they have sufficient cash reserves, often up to 18 months of mortgage payments, in savings. Retirement accounts, business funds, or even gifts can sometimes count toward these reserves.
• Closing Costs: Expect higher closing costs, typically 3% to 6% of the home’s purchase price, due to the size of the loan.
• Consistent Income: Lenders will scrutinize your income to ensure it is stable. You’ll likely need to provide multiple years of tax returns, W-2s, and bank statements to prove that your income is reliable.
• Manual Underwriting: Many jumbo loans undergo manual underwriting, which means a person reviews your entire financial profile in detail.

Applying for a Jumbo Loan

Here’s how the jumbo loan process works:

• • Choose a Mortgage Advisor: Shop around to compare rates and terms from multiple lenders with your Mortgage Advisor, Dustin Dumestre (Brokered Mortgage Advisor), as small interest rate differences can significantly impact your total loan cost.
  • Initial Mortgage Approval: Provide the lender with financial documentation to get pre-approved for a jumbo loan.
  • Submit an Offer: Once pre-approved, work with Dustin and his team to find a home, make an offer, and go under contract.
  • Underwriting and Appraisal: The lender will underwrite your loan and order an appraisal to ensure the home’s value justifies the loan amount.
  • Close the Loan: After the underwriting process, you’ll close on your loan by finalizing the paperwork and making any required down payments and closing cost payments.

VA Jumbo Loans

For eligible veterans, the VA offers jumbo loans with no specific loan limits. With a median credit score of 640, you may qualify for a VA jumbo loan up to $1.5 million. If your score is 680 or higher, you could secure a loan up to $2.5 million. Like all VA loans, jumbo VA loans are limited to primary residences only.

Jumbo loans are a great option for buyers looking to purchase high-priced homes in areas where property values exceed conforming loan limits. While these loans come with higher requirements, including larger down payments, stricter credit standards, and manual underwriting, they offer a flexible way to finance your dream home. With competitive rates and growing availability, jumbo loans are increasingly accessible for today’s buyers. Get with Dustin today to go over your options.