If you’re in the market for a mortgage, you may have come across the term “jumbo loan.” The phrase might make you think of supersized beverages or so-called “jumbo jets.”
These loans do have something in common with those items—as the term suggests, they’re big.
So what’s a jumbo loan? Jumbo loans, also known as jumbo mortgages are home loans that exceed conforming loan amounts as set by government sponsored entities (GSEs) such as Fannie Mae or Freddie Mac.
So how big does a loan have to be to be considered non conventional or “jumbo?”—those loan limits are set annually by the Federal Housing Finance Agency . These limits can vary depending upon where the home you’re buying is located (whether the property is located in what is classified as a high cost area).
The limit is higher in certain pricier areas. For example, the one-unit limit is $726,525 in places like San Francisco, Manhattan, and Hawaii. Given rising median home values in many cities, that means you don’t have to be rich to end up taking out a jumbo loan.
Here’s the lowdown on some things to expect with jumbo loans and whether you may need one for your upcoming home purchase.
Jumbo Loan, Defined
First, it helps to better understand the function of the government-sponsored entities (GSEs) Freddie Mac and Fannie Mae. While neither actually create mortgages, they do purchase and guarantee them through the secondary mortgage market.
Each year Fannie Mae and Freddie Mac join forces with their regulator, the FHFA, to set a maximum value for loans they will buy from lenders. Here’s where jumbo loans come in. Any loan that is higher than their set limit (a “conforming loan”) is a jumbo loan.
Because jumbo loans don’t meet Freddie and Fannie’s criteria for acquisition, they are referred to as non-conforming loans. Non-conforming, or jumbo, loans may come with different requirements because they may carry a higher risk for the lender.
And while there are differences, there are many ways in which jumbo loans are similar to a conforming loan. For example, jumbo loans can come in a variety of terms, and with fixed or variable interest rates.
With both conforming and non-conforming loans, borrowers will want to consider their options to ensure they’re signing up for a loan type that works best for them.
How to Qualify for a Jumbo Loan
Approval for Jumbo or Non Conforming loans depends on factors such as your income, debt, savings, credit history, employment status, and the property you intend to buy. That said, the standards can be a bit tougher for jumbo loans compared to a conforming loan.
The lender may be underwriting the loan manually, meaning they are likely to require much more detailed financial documentation—especially since standards grew more stringent after the 2007 housing market implosion.
Because lenders generally set their own terms for jumbo loans which may not adhere to qualified mortgage (QM) requirements the loan itself could look different from a conforming loan.
While there aren’t universal requirements for non-conforming loans—and the landscape for loan requirements is always changing—here are a few examples of potential heightened requirements for jumbo loans.
• Your debt-to-income ratio. This ratio captures how high your total monthly debt payments are compared to your gross monthly income. This figure helps lenders understand how much disposable income you have and whether they can feel confident you’ll be able to afford adding a new loan to the mix. To qualify for most Jumbo mortgages, you need a debt-to-income ratio no higher than 43% . For certain loan scenarios Lenders sometimes want to see an even lower debt-to-income ratio for a jumbo loan, or they may counter with less favorable loan terms for a higher DTI.
• Your credit score. This number, which ranges from 300 to 850, helps lenders get a snapshot of your credit history. The score is based on a variety of factors, such as strength of your payment history, the percentage of available credit you’re using, how often you open and close accounts such as credit cards, and the average age of your accounts. For a jumbo loan, some lenders require a minimum score of 700 or 720 for a jumbo mortgage, Keep in mind that a lower score doesn’t mean you won’t be able to get a jumbo loan — the decision depends on the lender and other factors, such as the loan program requirements, your debt, down payment amount and reserves.
• The down payment. Conforming mortgages generally require you to contribute a 20% down payment if you want to avoid paying private mortgage insurance, which helps protect the lender from the risk of default. Historically, some lenders required even higher down payments for jumbo mortgages, but that’s not necessarily the case anymore. Typically, you’ll need to pay at least 5% down. But keep in mind that if you pay less than 20%, you may be looking at less favorable terms or PMI premiums.
• Your cash savings. Jumbo loan programs often require what is referred to as reserves in your bank account after loan closing. Reserves can also be in accounts such as 401K or IRA. The number of months of PITIA house payments (PITIA = principal, interest, taxes, insurance, other assessments such as HOA dues) needed in reserves after loan closing can vary depending upon many factors. For a jumbo loan, some lenders may require a reserve fund between three months and two years of housing payments. That’s much higher than the typical reserves expected for a conforming mortgage. But you don’t necessarily need to have all this money in cash—some lenders can consider up to 70% of your retirement account balances in this calculation. Also, depending upon the loan program parameters, a lender may be comfortable with lower cash reserves if you have factors such as a high fico, low debt-to-income ratio or a high down payment.
• Documentation. Lenders want a complete financial picture for any potential borrower, and jumbo loan borrowers are no exception. Most lenders operate under the “Ability to Repay” rule. Under this rule, lenders must document a borrower’s ability to repay the loan. Applicants should expect lenders to review credit and documentation of income (pay stubs and W2s) and assets.
Jumbo Loan Interest Rates & Costs
You might assume that interest rates for jumbo loans are higher than for conforming loans, since the lender is putting more money on the line.
But like other kinds of interest rates, jumbo loan rates fluctuate with market conditions. Lately, jumbo mortgage rates have been similar to those of other mortgages and sometimes even lower.
Also, because the absolute dollar figure of the loan is higher than with a smaller, conforming loan, it is reasonable to expect closing costs to be higher. Some closing costs are fixed, such as a loan processing fee, but other closing costs are tiered based on the purchase price or loan amount such as title insurance.
Again, none of these parameters are set in stone. It’s generally smart for borrowers to research multiple lenders and their jumbo loan requirements.
When Does a Jumbo Loan Make Sense?
You can use a jumbo loan to purchase all kinds of residences, from your main home, to a vacation getaway, to an investment property. A jumbo loan might be a good fit for borrowers looking to buy luxury real estate, or for prospective buyers looking to get a home in an expensive housing market.
Because of the more stringent requirements, jumbo loans can be more accessible for borrowers with higher incomes, strong credit scores, modest debt-to-income ratios, and plentiful cash reserves.
However, don’t assume that jumbo loans are just for the rich. Lenders offer these loans to borrowers with a wide variety of income levels and credit scores.
And different lenders have different requirements, so shop around to see what terms and interest rates are available to you. The most important factor, as with any loan, is that you are confident in your ability to make the mortgage payments in full and on time in the long term.
Where to Find a Jumbo Loan
Institutions that can offer borrowers a conforming loan are typically able to offer a nonconforming or jumbo loan. Borrowers can shop around with banks, credit unions, and online lenders.
What about Refinancing?
After you’ve gone through the mortgage and home buying process, it could be helpful to have information about refinancing. Some borrowers choose to refinance in order to secure a lower interest rate or more preferable loan terms.
This could be worth considering if, for example, your personal situation improves or the mortgage interest rates fall.
Refinancing a jumbo mortgage to a lower interest rate could result in substantial savings, since the initial sum is so large, even a change of just a percentage point could be impactful.
Beyond a potentially lower interest rate, refinancing could also result in improved loan terms. For example, if concerns about fluctuating interest rates are worrying you, you could refinance an adjustable rate mortgage into a fixed rate.
If you’re interested in refinancing a jumbo mortgage, consider SoFi. With SoFi you won’t encounter any hidden fees, nor any prepayment penalties.
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