When is a regular mortgage not enough?
When the loan amount to purchase a property exceeds the conforming loan limit of $726,200*.
To understand a Jumbo loan, you must understand two other terms: conforming and non-conforming loans. Conforming loans adhere to the loan limit guidelines set by the Federal Housing and Finance Agency (FHFA). Conversely, non-conforming loans exceed those loan limit guidelines. This limit varies depending on the cost of living in each area. Jumbo loans are generally used for higher-priced homes and are non-conforming because they do not satisfy the terms and conditions set forth by Fannie Mae, Freddie Mac, and their regulator, The FHFA.
Jumbo loans typically require a higher down payment and credit score and adhere to stricter underwriting rules than conforming loans. Additionally, jumbo loan interest rates tend to be slightly higher than conforming loan rates.
Because jumbo loan amounts are larger than conforming ones, they can be harder to qualify for and considered riskier. Borrowers seeking jumbo financing need an excellent credit rating, higher incomes, and some cash reserves to show their ability to repay the loan.
They do offer an advantage over conforming loans. Since jumbo loans are not subject to the same limits as conforming loans, borrowers can access larger loan amounts, making them ideal for financing more expensive properties. In addition, jumbo loans are available as fixed-rate loans and adjustable-rate mortgages.
If you are financing a property over the conforming loan limit for your area, you’ll most likely need a jumbo mortgage. However, you can avoid a jumbo mortgage by putting down a larger down payment and reducing your loan amount. This strategy is often used by borrowers whose credit score is not up to par with the jumbo underwriting guidelines.
Highlights about Jumbo Loans
- Credit Score: Jumbo loans typically require a credit score above 660
- Debt to income: How much you owe versus how much you make. Jumbo loan underwriting requires a DTI of around 43%
- Cash reserves: You may be required to show cash reserves to cover a minimum number of monthly payments.
- Loan to value ratio: 80% LTV is a good starting point for the best jumbo mortgage rates. (To calculate an LTV ratio, divide your loan by the property’s total appraised value or purchase price, whichever is lower). However, we offer a jumbo product for financing up to 90% LTV.
- Down payment: 20% or more is the best option for a Jumbo loan to get the best mortgage rates.
- Loan Amounts: Up to $3 Million
- Alternative Income Options: Bank Statements option to prove income may be available.
The loan amount is the significant difference between a jumbo and a conforming loan. As you borrow more money to purchase your home, the risk of default in the eyes of the lender becomes more concerning. When looking at higher prices homes, you may need a jumbo loan, so it is essential to get your finances in order. The better your financial profile, the easier it will be to qualify and the quicker your loan will be approved.
As property values continue to rise, borrowers may need more jumbo loan options. But, as always, speak with an experienced loan officer who can help you determine if a jumbo loan is right for your needs.
*Loan limit accurate as of 6/6/2023.