What Is a Jumbo Loan?

Mortgages, Non-Conventional Mortgage, Types of Mortgages

Let’s get into this. 

A jumbo loan is exactly what you think it is: a ginormous load of cash. We’re talking over $550,000 to buy a house. 

These loans are ideal for buyers who have strong financial profiles and need access to much higher loan amounts than they would get under a conforming loan’s limit (that’s $548,250, to be exact). 

This is no simple loan application for that very reason. Freddie Mac and Fannie Mae don’t back this type of lending, which makes it riskier for lenders. That translates into more hoops to jump and more fees for the borrower. 

Like any loan, the best deal is the one with the lowest fees and rates at the amount you need, so it’s worth it to shop around. To be a savvy shopper, you’ll need to know a few important things.

How a Jumbo Loan Works

Jumbo loans work the same way that conforming or conventional loans work, but their dollar amounts exceed Fannie Mae and Freddie Mac loan limits. 

Because of the big money at stake, jumbo loans pose a higher risk to lenders, so credit requirements are way, way tighter.

Jumbo Loans vs. Conforming Loans

Jumbo loans and conforming loans (aka a conventional loan) essentially work the same. Both are great options for financing your home purchase. 

While a jumbo loan limit is higher, the application process and terms are usually similar.

If you’re house shopping in a high-cost area, expensive city or a hot seller’s market, you’re probably going to need more than you can get with a conforming loan. 

To go for the gusto with a jumbo loan, take a second to read up on what it takes to get one.

How To Qualify for a Jumbo Loan: A Clean Bill of Health

The process for qualifying for a jumbo loan isn’t much different – but the stakes are higher. You’ll need a financial profile no lender could resist: a high credit score, a low debt-to-income (DTI) ratio and a steady income. Lenders love to see it!

This is the moment when your meticulous credit score maintenance pays off. To qualify for a jumbo loan, expect your lender to look for a FICO® credit score of at least 700. (To be on the safe side, aim for 720, which most lenders prefer.) 

Since a good credit score reflects a history of on-time loan repayments, the higher your score is, the higher the lenders’ confidence will be that you can pay off their jumbo loan. And, of course, that means having mucho dollars to cover that repayment – which leads us to the next point.

Debt-to-income ratio: How low can you go?

Your debt-to-income (DTI) ratio plays a major role in helping you qualify for a jumbo mortgage loan. While lenders look for a maximum DTI ratio of 43% when approving jumbo loans, most prefer a DTI ratio of 36% or less. 

These strict DTI requirements stem from the Consumer Financial Protection Bureau’s qualified mortgage rule, which requires lenders to make reasonable determinations of a borrower’s ability to repay their mortgage. 

When it comes to debt, less is more. You’ll want to make more with your income than you’re spending on debt. 

Keep your balances low and try not to apply for a new loan or line of credit before you submit your application. We know you want to trick out your soon-to-be pad, but it may hurt your credit score.

Show your savings account some love! While lenders prefer a low DTI ratio, some are willing to show some flexibility if your cash reserves are above the lender’s requirements.

Cash reserves: What does that savings account look like? ?

Each lender’s requirements are different, but in most cases, cash reserves are among the many things they look at when issuing jumbo loans. Most prefer to see that borrowers have enough cash on hand to cover at least a year of mortgage payments.

If you’re applying for a standard 30-year fixed-rate jumbo mortgage, your monthly payments are likely going to be pretty high. Showing your lender that you’re capable of handling that, even when income isn’t flowing in, is a great way to stand out (in a good way) during the application process.

Documentation: The usual (but more extensive)

Jumbo loans are high-dollar-value loans, which makes them high-risk loans for lenders. So, it should come as no surprise that a lot more goes into the qualification process. 

Like traditional mortgages, lenders will ask you to provide proof of employment, with pay stubs from at least the most recent 30 days, W-2 and 1099 tax forms dating back 2 years, loan documents and any proof of nonliquid assets. 

Additionally, you should be prepared to prove that you have access to cash reserves equal to an additional 6 months of mortgage payments.

If you’re self-employed, chances are that you’ll also need to provide a profit and loss statement and balance sheet. Why? Since self-employment can also mean unpredictable and inconsistent work (think: unpredictable income), lenders want to be extra sure that you’ll be able to cover your mortgage payments.

The appraisal

Thanks to the high value of your potential new home, your lender will keep a keen eye on the appraisal process. Plan for a second appraisal on your new home, especially if the sale price is in the millions.

Jumbo Loan Requirements and Limits: Yes, There’s More

The loan ain’t the only thing that’s jumbo about a jumbo loan. The interest rates and down payments get jumbo-sized, too.

Interest rates: Not exactly one for all

While jumbo mortgages are starting to carry average annual percentage rates (APRs) that are close to or the same as conforming mortgage rates, depending on the lender, many jumbo loan borrowers get higher interest rates. With jumbo loan lenders’ stricter underwriting guidelines, you can expect higher rates if your cash reserves or FICO® Score hover around the minimum required. 

If you want to pay less interest on your mortgage loan, swap out that coveted Balenciaga parka for credit score best practices. 

It’s all about risk, baby … low risk. The less of a risk you appear to be to your lender, the more leverage you’ll have to negotiate fees and rates.

Down payments: What goes down must come up

One jumbo loan requirement that has eased up in recent years is the down payment requirement. 

Back in the day, most lenders required that buyers put down at least 30% of a home’s purchase price. Today, lenders are issuing jumbo loans for as little as 10% – 15% down. 

While 10% – 15% down sounds ideal, just know that there are pluses to consider if you make a higher down payment. 

Here’s one: You’ll save on interest payments over the life of the loan. And here’s another one: You’ll avoid the added cost of private mortgage insurance (PMI) if you put at least 20% down.

Types of Jumbo Loans, You Say?

There are several types of jumbo loans out there: primary, cash-out refinance and nonprimary. Each one is designed to fulfill different needs, and their requirements are pretty much the same. 

I’m … Which means I’m probably best suited with a … Depending on …
Buying a one-unit primary property with a loan amount of up to $2 million Primary Home Purchase Jumbo Loan 680+ credit score10.01%+ down payment (up to 25% more for a greater unit and loan amount property)45% or less DTI
Buying a primary one- or two-unit vacation or investment property Cash-out Refinance Jumbo Loan The same requirements as primary homes, plus equity in the home
Buying or refinancing nonprimary properties Investment Properties Jumbo Mortgage The same requirements as primary homes

Is a Jumbo Loan Right For You? Surprise! It Depends on Your Income

Are you a HENRY? You know: High Earners, Not Rich Yet? 

HENRYs earn between $250,000 and $500,000 but haven’t saved enough or invested enough to be considered wealthy. 

IRL, that might look like having enough cash for a soul-searching trip to India, but not enough to afford a seat on Jeff Bezos’ rocket and cruise the edge of space for 11 minutes. 

If that’s you, a jumbo loan may be just what you need to get the home that suits your lifestyle. 

Even without a ton in savings or investments, lenders are generally less nervous about providing jumbo loans to high-income earners because of their higher FICO® Scores, strong credit histories and typically solid contributions to their retirement accounts. 

Go Big and Go (Get That) Home

Are you ready to move to the address that gets you the good table at a restaurant? (Yes, that’s a thing.) 

If you’re really trying to snag that lux pad you favorited in your home listings, a jumbo loan is the best way to get your hands on the cash you need to go big!

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