Jumbo loans: What are they and how do I qualify?
Do you need a jumbo loan?
- A jumbo loan exceeds the maximum amount for a loan that can be sold to Fannie and Freddie.
- Jumbo loans typically require stronger credit, larger financial reserves and a larger down payment.
- FHA-guaranteed jumbo loans are available depending on the cost and location of the home.
When shopping for a home, it may seem like every property you see is expensive. There are federal rules for what is considered high cost, however.
If you’re looking to purchase a luxury residence or a home in a particularly pricey, in-demand area, you may have to obtain a jumbo mortgage.
A jumbo loan is a mortgage that exceeds the U.S. Federal Housing Finance Agency’s set limit on conforming loan sizes. A conforming loan is a mortgage that meets certain criteria in order to be eligible for sale to the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.
Lenders frequently sell conforming mortgages to the GSEs in the secondary market in order to free up capital to make more loans. If a loan is nonconforming, it cannot be sold to a GSE and often must remain in the lender’s portfolio for the duration of its term.
Jumbo loans are a type of nonconforming loan. As of 2018, mortgages that exceed $453,100 are considered jumbo in many counties in the U.S. The limit, however, can be as high as $679,650 in certain high-cost property markets. Consult the Federal Housing Finance Agency’s full list of conforming loan limits to find your county. Jumbo loans can be used to finance a primary residence, second residence, vacation home or investment property.
Jumbo loans are evaluated in the same manner as conforming loans. Given that the lender must keep the loan on their books, however, there are stricter eligibility requirements.
- Second home appraisal: Oftentimes lenders will call for an additional appraisal on a jumbo loan property.
- Strong credit: A minimum credit score of 680 is required, but many jumbo loan borrowers have a score above 700.
- Low debt-to-income ratio: As the borrower is taking on significant debt with a jumbo loan, lenders want to see a low debt-to-income ratio of 40 percent to 45 percent.
- Large financial reserves: To mitigate the risk of default, most lenders require jumbo borrowers to have sufficient upfront financial reserves — up to 20 percent of the value of the loan.
As a nonconforming loan, jumbo mortgages can differ greatly from each other depending on the lender, so it is important to shop around.
Typically, the following conditions apply:
- Large down payment: Given the larger size of the mortgage, jumbo loans typically require a down payment of 15 percent to 30 percent. While lower down payment options exist, it will increase the interest rate of the loan.
- No mortgage insurance: Jumbo loans usually do not require mortgage insurance, because the lender has received a large down payment and vetted your financials and credit score. If you make a down payment of less than 20 percent, mortgage insurance may be required.
- Comparable interest rates: Jumbo loans do not necessarily have higher interest rates than conventional loans. While a low down payment or weaker credit score can result in higher rates, typically jumbo mortgage rates are competitive and can be either fixed or variable.
- Higher fees: The detailed eligibility requirements and increased vetting associated with jumbo loans often results in more paperwork and higher loan-closing fees.
FHA jumbo loans
The U.S. Federal Housing Administration (FHA) guarantees private loans so that lenders can extend more favorable mortgage conditions to homebuyers, typically those with lower incomes.
As of 2018, the FHA’s loan limits can be as high as $679,650 in certain higher-cost areas, meaning loan amounts above that amount, or those above the lesser conforming-loan caps set for lower-cost areas, fall into the category of nonconforming jumbo loans.
FHA jumbo loans have higher costs than normal FHA-backed loans and may have higher FICO credit score requirements. In addition, down payment assistance is not permitted on FHA jumbo mortgages nor is cash back allowed at closing.