What is Jumbo Loans?
A jumbo loan, also known as a non-conforming loan, is a type of mortgage that is utilized to finance properties that exceed the maximum amount allowed for a conventional conforming loan. The 2024 conforming loan limit, as established by the Federal Housing Finance Agency (FHFA), is $766,550 for most counties. Therefore, any homes that surpass this limit require a jumbo loan.
Since Jumbo Loans cannot be guaranteed by Fannie Mae and Freddie Mac, lenders regard them as riskier. This lack of guarantee means that lenders are not protected from potential losses in the event of borrower default. Furthermore, jumbo loans cannot be resold and therefore typically remain on the lenders' portfolios, making them a form of portfolio loan.
Requirements
The underwriting criteria for jumbo loans are typically more stringent compared to conforming loans, primarily due to their larger size and inherent risk. However, since lenders are not bound by FHFA standards, each lender has the freedom to establish its own requirements. They may even be willing to flex their rules for specific borrowers. Given the significant variation among lenders, it is certainly prudent to thoroughly research multiple jumbo loan lenders.
In terms of down payment, jumbo loans usually mandate a considerably larger upfront payment compared to conforming loans. While down payments for jumbo loans usually start at 10%, some borrowers may be required to put down more, potentially exceeding 20%, depending on their overall financial assets.
Credit score requirements for jumbo loans are typically higher than those for conforming loans. Lenders often expect a FICO score of 700 or higher, and in some cases, as high as 760, as a prerequisite for qualifying for a jumbo loan. As with any type of home loan, a stronger credit score is likely to be advantageous.
Lenders also take into consideration the borrower's debt-to-income ratio (DTI) to ensure that they do not become excessively leveraged. However, some lenders may show more flexibility if the borrower possesses substantial cash reserves or demonstrates a solid overall financial situation. Nevertheless, certain lenders may establish a firm limit of a 43% DTI.
Having a substantial amount of cash in your bank account increases your chances of obtaining approval for a jumbo loan. It is not uncommon for lenders to request jumbo loans from borrowers to demonstrate that they have sufficient cash reserves to cover mortgage payments for up to one year.
Extensive documentation is necessary to verify your financial health, possibly more than what is required for a conforming loan. When applying, you should be prepared to present your complete tax returns, W-2s, and 1099s, along with bank statements and information regarding any investment accounts. Jumbo loans often undergo manual underwriting, meaning that an actual person will thoroughly review your financial details.
For the property you intend to purchase, some lenders may require more than one home appraisal. The purpose of the appraisal is to ensure that the property's value matches the amount being paid for it, providing reassurance to the lender. Given the higher cost of the home, it is understandable that the lender wants to be especially certain about its value.
The decision about whether you need a jumbo loan may depend on the price of the property you wish to buy. However, if you are considering purchasing a property that falls near the conforming loan limit for your area, it is worth considering the advantages and disadvantages of jumbo loans.
Strategies for obtaining the best jumbo mortgage rates
- It is prudent to ensure that your financial situation is in optimal condition when seeking a jumbo loan. This involves bolstering your savings, obtaining credit reports from Equifax, Experian, and TransUnion, and resolving any inaccuracies you discover. Additionally, it may be beneficial to pay off any significant outstanding balances.
- Considering that jumbo loans typically have stricter requirements than conventional or government-backed loans, any improvements made to your financial profile are likely to result in more favorable rate offers.
- Once you have confidence in your loan application, it is worthwhile to compare mortgage rates from at least three different jumbo lenders. Even slight differences in the interest rate can potentially save you thousands of dollars over the duration of the home loan.
- If the interest rates quoted for jumbo loans are higher than those for conventional loans, it may be worthwhile to consider increasing your down payment or exploring alternative options. If your savings permit, an 80-10-10 loan, also referred to as a piggyback loan, allows for a 10% down payment while taking out two mortgages. The first mortgage covers 80% of the home's cost, thereby falling below the jumbo loan threshold, and the second mortgage covers 10% of the home's cost.