After finding that big, beautiful house, you now have to find a big, beautiful mortgage. If the amount you need to borrow is over the Federal Housing Finance Agency (FHFA) conforming loan limit of $806,500 for most geographic areas, you’ll need to get a jumbo loan.
A jumbo loan is a little different than a conventional, conforming mortgage and has its own benefits and drawbacks. You can expect increased scrutiny from potential lenders, and possibly some increased costs.
Key Points
• Jumbo loans are required for properties exceeding the conforming loan limits set by the Federal Housing Finance Agency.
• Benefits of jumbo loans include higher loan amounts and interest rates that are often comparable to or even lower than those of conventional loans.
• Drawbacks of jumbo loans include more stringent qualifications, the need to show cash reserves, and higher costs.
• To qualify for a jumbo loan, borrowers typically need a credit score of 700 or higher, a down payment of at least 10%, and a low debt-to-income ratio.
• Jumbo loan requirements often include cash reserves equal to 6 to 12 months or more of mortgage payments and a higher income amount.
Jumbo Loans: The Basics
Luxury homes, vacation homes, unique properties, and homes in high-cost-of-living areas may need a jumbo loan. A jumbo loan is different from a conventional home loan in that it isn’t guaranteed by Fannie Mae or Freddie Mac. This means the lender takes on more risk to issue a mortgage to the borrower. With the additional risk exposure, lenders have higher qualifications for borrowers. These may include:
• A higher credit score
• A larger down payment
• Strong cash reserves — sometimes up to a year’s worth of mortgage payments
• A higher income
• A low debt-to-income ratio
• More stringent loan-to-value requirements
While the qualifications and loan amounts may be different, lenders may offer an interest rate similar to what you would find for a conventional loan below the conforming loan limits.
Keep in mind the more stringent requirements shouldn’t dissuade you from looking into jumbo loans. On the contrary, let’s take a closer look at jumbo loan pros and cons to help you decide if you want to go this direction or not.
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Benefits of Jumbo Loans
A jumbo loan may allow you to buy property you otherwise wouldn’t be able to. Some of the main benefits of a jumbo loan include:
• Higher loan amount. A jumbo loan allows you to purchase property at a higher price point. If you’re looking for high-end property, a vacation property, or your dream home, a jumbo loan may be able to help you access the financing you need. Depending on where the property is located, the conforming loan limits are either $806,500 or up to $1,209,750.
• Comparable Interest rates. You may be surprised to learn that interest rates on jumbo loans may be comparable to those of conforming conventional loans. Sometimes, they’re even lower!
• Might avoid PMI. There are some lenders that allow you to forgo private mortgage insurance with a jumbo loan, especially if you put down at least 10% on a property. This can save you money every month.
💡 Quick Tip: A major home purchase may mean a jumbo loan, but it doesn’t have to mean a jumbo down payment. Apply for a jumbo mortgage with SoFi, and you could put as little as 10% down.
Drawbacks of Jumbo Loans
While jumbo loans can afford you the loan you need for a higher-priced property, they do have some drawbacks you should be aware of.
• More stringent qualifications. Jumbo loans are tougher to get. You need a higher income, a high credit score, and a big down payment. Lenders also want to see a debt-to-income (DTI) ratio lower than 43%, and the loan-to-value (LTV) ratio may max out at 80% of a property’s value.
• Potentially higher rates. Jumbo loans are not guaranteed by Fannie Mae or Freddie Mac, so a jumbo loan can reduce a lender’s liquidity and expose them to more risk. In the past, jumbo loans have been offered at higher interest rates, though recently, many lenders are offering jumbo loans at a lower interest rate than a conventional mortgage.
• Need to show cash reserves. For some of the best terms for jumbo loans, you may need to show anywhere from three to 24 months’ worth of cash reserves. Furthermore, jumbo loan lenders have different standards when it comes to what is considered a cash reserve. Some lenders may be able to count your 401(k) as part of your cash reserves, while others require money to be held in a more liquid account.
• Fewer lenders offer jumbo loans. This doesn’t mean jumbo loans are uncommon by any means, but you do have to find a lender in your area that offers jumbo loans.
• Higher costs. Because jumbo loans are so large, you have higher costs all around. Closing costs are based on a percentage of the transaction. With a higher loan amount, you’ll pay more for these services. You’ll also pay more for fixed-cost services, such as an appraisal or a home inspection, if your home is larger and has more to evaluate.
How Hard Is It to Qualify for a Jumbo Loan?
It’s true that fewer borrowers will be able to qualify for a jumbo loan. But if you know what lenders are looking for, your odds are good. Jumbo loan requirements may include:
• Credit score of 700 or higher
• Down payment of 20%, although some lenders allow as little as 10% down
• LTV ratio around 80% or lower
• DTI ratio of 43% or lower
• Cash reserves equal to 6 to 12 months of the monthly mortgage payment
• Higher income amount
💡 Quick Tip: Your parents or grandparents probably got mortgages for 30 years. But these days, you can get them for 20, 15, or 10 years — and pay less interest over the life of the loan.
Jumbo Loan vs Conventional Loan
Technically, jumbo loans are conventional loans. A conventional loan is a mortgage that isn’t a government-backed mortgage. What’s different about a jumbo loan is that it is not a conforming conventional loan.
A conforming conventional loan is one where the loan amount is less than the conforming loan limit of $806,500 for most areas and $1,209,750 for high-cost areas. This distinction is important, but it’s also common to call a conforming conventional loan simply a conventional loan.
Recommended: What is the Difference Between Jumbo vs. Conventional Loans?
Aside from the loan amount, other major differences between a jumbo loan and a conventional conforming loan include the down payment amount, credit score requirement, LTV ratio, DTI ratio, income requirement, and cash reserve requirement. These key differences are outlined in the chart below:
| Jumbo Loan | Conventional Conforming Loan | |
|---|---|---|
| Loan amount | Loan higher than $806,500 in most areas or $1,209,750 in high-cost areas. | Loan lower than $806,500 in most areas or $1,209,750 in high-cost areas. |
| Down payment | Down payment as low as 10% | Down payment as low as 3% |
| Credit score | 700+ | As low as 620 |
| LTV | Around 80% | As high as 97% |
| DTI | 43% or lower, 36% for some lenders | Up to 50% |
| Income | Higher | Lower may be acceptable |
| Cash reserves | As much as 12 months or more | Not required |
Recommended: What is the Difference Between Jumbo vs. Conventional Loans?
The Takeaway
If you have your eye on a property that exceeds the conforming home loan limits for your area, a jumbo loan can make it happen for you. Prepare yourself for the more stringent salary, credit score, and cash reserves requirements and soon you may be able to call that home yours.
When you’re ready to take the next step, consider what SoFi Home Loans have to offer. Jumbo loans are offered with competitive interest rates, no private mortgage insurance, and down payments as low as 10%.
FAQ
Who qualifies for a jumbo loan?
Borrowers with a high income, an excellent credit score, substantial funds on hand for a down payment (plus large cash reserves), and a low debt-to-income ratio may qualify for a jumbo loan. Check with lenders to learn their specific requirements.
How do you apply for a jumbo loan?
You can apply for a jumbo loan through any lender that offers a jumbo mortgage product.
Photo credit: iStock/FOTOGRAFIA INC.
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
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