A jumbo loan is something you’ll likely need if you’re looking to purchase a luxurious home, one whose features are more expensive than the average property in the area. What qualifies as a jumbo loan in your neck of the woods depends on the county in which you live.
Let’s explore the details around getting a jumbo loan.
What’s a Jumbo Mortgage Loan?
If you’re in the market for a new home and the asking price is higher than average, you might need to consider getting a jumbo loan.
Technically, a jumbo loan is a mortgage whose size surpasses the threshold set by government agencies Fannie Mae and Freddie Mac. These government-sponsored enterprises (GSE) are responsible for buying up the lion’s share of U.S. single-family mortgages, but not when it comes to oversized loans.
Due to their nature as non-GSE products, jumbo mortgages are considered non-conforming loans.
Considering that jumbo loans fall outside the parameters of the GSEs, they do not qualify for the government guarantees that their conforming loan counterparts receive. As a result, jumbo home loan requirements can be more stringent than secured loan products.
Jumbo vs. Conventional Loan
The GSEs were formed so that banks and credit unions would have enough cash on hand to perpetuate the lending process to other homebuyers.
A key feature of conforming loans is a cap placed on the amount, which protects the government from getting stuck holding too big a bag from borrowers who turn out to be a credit risk.
Jumbo loans are outsized mortgages for homes on the expensive side of the price spectrum. Often, a jumbo loan is appropriate if you are looking to buy a luxury home that stands out from the pack in the neighborhood, but that’s not always the case.
In a white-hot real estate market, you might find yourself needing to access a jumbo mortgage to outbid the competition.
Interest rates attached to jumbo loans are likely to exceed conventional loans because of the bigger risk to lenders. A similarity between jumbo and conventional loans is that both are repackaged and sold to investors in the secondary market.
However, due to their size, jumbo mortgages attract a different set of investors with a different risk profile.
Conforming Loan Limit Explained
The restrictions around conforming loans mainly involve the size of the mortgage. The Federal Housing Finance Agency, the department that oversees Fannie Mae and Freddie Mac, updates these parameters annually.
In 2021, conforming loan limits prices were $548,250 for single-family homes and increased to $647,200 in 2022.
The conforming loan limits are adjusted each year due to fluctuations in the average U.S. home price. Between Q3 2020 and Q3 2021, the average home price increased an average of 18.05%, which established the baseline from which the conforming loan limit was set.
Total Mortgage works with borrowers across the United States, making it easy to find a mortgage expert near you.
How Do Jumbo Loans Work?
When you’re getting a jumbo loan, it helps to know what to expect beforehand. We have streamlined the mechanics of jumbo mortgages so you’re not taken by surprise:
- Higher Rates: Interest rates on jumbo loans tend to be higher than those on conforming loans to reflect the greater risk the lender is inheriting. According to Experian, you can expect a jumbo loan interest rate to be 1-2% higher vs. the going rates for more conventional loan products.
- Second Opinion: You might need more than one appraisal. Considering the sheer size of a jumbo mortgage and potentially tough comps by which to compare the home’s market value, lenders may ask for two appraisals. They want to make sure that the value of the home measures up to the price.
- Higher Expenses: Expect the closing costs to be higher than traditional loans. Lenders will generally charge a percentage of the home’s total purchase price that’s higher than usual because of the extra vetting that jumbo mortgages lend themselves to. According to Bankrate, as of Q1 2021, the average closing costs for a typical mortgage range between 2% and 5%, or $6,837 for a single-family property.
Requirements for a Jumbo Loan
Jumbo home loan requirements will vary from lender to lender, but everything is higher as a general rule of thumb. This is due to the bigger size of these mortgages, which places more risk on the lender’s shoulders.
Here’s a breakdown of the requirements for a jumbo loan:
- Credit Score: You’ll need pristine credit to qualify for a jumbo loan. Lenders will be looking for a FICO credit score of at least 720, though they may be willing to go as low as 660. By comparison, borrowers could qualify for a conventional mortgage with a credit score of as low as 600.
- Down Payment Amount: Expect to plunk down anywhere from 20-30% of the home’s purchase price as a down payment. A silver lining is that with a down payment of this size, as long as it doesn’t dip below the 20% threshold, you may not need to invest in private mortgage insurance (PMI).
- Debt-to-Income (DTI) Ratio: Lenders want to see that your debt-to-income (DTI) ratio, which is the result of dividing your monthly expenses by your gross monthly income, does not exceed 36%. By comparison, lenders could be willing to overlook a DTI as high as 50% for a conventional mortgage.
- Net Worth: Considering the risk that a lender is taking on, they might require borrowers to provide proof that they can liquidate other assets, if necessary. This is to cover the cost of the jumbo mortgage payments for 12 months.
Explore Total Mortgage’s Jumbo Loan Options
If your next home is one that is probably going to turn some heads, and you’ve got the credit profile and income required, you came to the right place. Consider jumbo loan options from Total Mortgage, whether a 10/1 ARM, 15-year, or 30-year mortgage, and apply online today.