Understanding the Term ‘Jumbo Mortgage’

If you’re like most prospective home buyers, you’ll likely apply for a common mortgage loan called a conforming loan. Though the Federal Housing Finance Agency establishes limits on conforming loans, borrowers may still exceed conforming loan amounts in particular cases. When this occurs, the mortgage instrument is called a jumbo mortgage.

What is a jumbo loan?

A jumbo loan is a type of mortgage that is used to finance properties that are too expensive to qualify for a traditional conforming loan. According to the Federal Housing Finance Agency, the maximum amount for a conforming loan in most counties is $548,250. (FHFA). It’s required for homes that exceed the local conforming loan limit.

Jumbo loans are riskier for lenders because they are not insured by Fannie Mae or Freddie Mac. Jumbo loans typically come with a fixed or adjustable interest rate and a variety of terms.

Qualifying for a jumbo loan

Because jumbo loans are larger and riskier for lenders, underwriting criteria are more stringent.

Credit score

To qualify for a jumbo loan, lenders may require a FICO score of at least 700, and occasionally as high as 720.

Debt-to-income ratio

Lenders will look at your debt-to-income ratio (DTI) to make sure you don’t get into too much debt, however they may be more lenient if you have a lot of cash on hand. However, some lenders have a hard cap of 45 percent DTI.

Cash reserves

If you have a lot of money in the bank, you’ll have a better chance of getting a jumbo loan. Lenders frequently urge jumbo loan customers to show that they have enough financial reserves to repay a year’s worth of mortgage payments.

Documentation

You’ll need a lot of documents to verify your financial stability, sometimes even more than for a conforming loan. Prepare your tax returns, W-2s, and 1099s, as well as bank statements and investment account information.

Appraisals

A second home appraisal for the property you want to buy may be required by some lenders.

Jumbo loans vs. Conforming loans

The size of the loan is the main distinction between a jumbo and a conforming loan. Read about the distinctions between conforming and nonconforming loans for a comprehensive look at the two, as well as the benefits and drawbacks of each.

Other variables that distinguish jumbo loans from conforming loans include:

A large down payment

While low down payments are usual on conforming loans, jumbo loans are more likely to require a down payment of at least 20%, with some lenders allowing as little as 10%.

Potentially higher interest rates

Depending on the lender and your financial circumstances, jumbo mortgage rates may be slightly higher than conforming loan rates. Depending on market conditions, many lenders can offer jumbo loan rates that are competitive with conforming loan rates. Some may even offer somewhat lower rates, so search around.

Higher closing costs and fees

Because jumbo loans are larger and require more qualification stages, expect higher closing fees.

Loan limits

Because certain real estate markets are substantially more expensive than others, the conforming loan maximum varies by county. In most counties around the US, the conforming loan ceiling for one-unit homes in 2021 is $548,250. When it comes to high-cost locales, conforming loan limits have been raised to $822,375. Such as the Northeast and the West Coast, and even higher in a few other places.

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