Jumbo loans go above and beyond. Mortgages that conform to the dollar limits set by the Federal Housing Finance Agency (FHFA) are called conforming loans. Loans that exceed those limits are jumbo loans.
Jumbo mortgages may be needed by buyers in expensive housing pockets, lovers of high-end homes, investors, and vacation home seekers.
Jumbo Loan, Defined
What is a jumbo mortgage? First, it helps to understand the function of Freddie Mac and Fannie Mae. Neither government-sponsored enterprise actually creates mortgages; they purchase them from lenders and repackage them into mortgage-backed securities for investors, giving lenders needed liquidity.
Each year the FHFA sets a maximum value for loans Freddie and Fannie will buy from lenders—“conforming loans.”
Because jumbo loans don’t meet Freddie and Fannie’s criteria for acquisition, they are referred to as nonconforming loans. Nonconforming, or jumbo, loans usually have stricter requirements because they carry a higher risk for the lender.
How Big Is ‘Jumbo’?
So how large does a loan have to be to be considered jumbo? In most counties, the conforming loan limits for 2021 are:
• $548,250 for a single-family home
• $702,000 for a two-unit property
• $848,500 for a three-unit property
• $1,054,500 for a four-unit property
The limit is higher in pricey areas. For 2021, the conforming loan limits in those areas are:
• $822,375, one unit
• $1,053,000, two units
• $1,272,750, three units
• $1,581,750, four units
Given rising home values in many cities, a jumbo loan may be necessary to buy a home. Teton County, Wyoming, for instance, has a median home value of over $900,000 and a a conforming loan limit of $822,375.
Qualifying for a Jumbo Loan
Approval for jumbo loans depends on factors such as your income, debt, savings, credit history, employment status, and the property you intend to buy. The standards can be tougher for jumbo loans than conforming loans.
The lender may be underwriting the loan manually, meaning it’s likely to require much more detailed financial documentation—especially since standards grew more stringent after the 2007 housing market implosion and during the pandemic.
Lenders generally set their own terms for jumbo loans, and the landscape for loan requirements is always changing, but here are a few examples of potential heightened requirements for jumbo loans.
• Your debt-to-income (DTI) ratio. This ratio compares your total monthly debt payments and your gross monthly income. The 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 mortgages, you need a DTI ratio no higher than 43%. In certain loan scenarios lenders sometimes want to see an even lower DTI 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 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 to 740 for a primary home, or up to 760 for certain property types. 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.
• Down payment. Conforming mortgages generally require 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 put at least 20% down.
A VA loan can be used for jumbo loans. The Department of Veterans Affairs will insure the part of the loan that falls under conforming loan limits. The down payment requirement is based on the portion of the jumbo loan that’s above the conforming loan limit. The loan is available from some lenders with nothing down and no PMI. VA loans have a one-time “funding fee,” though, a percentage of the amount being borrowed.
• Your savings. Jumbo loan programs often require mortgage reserves, housing costs borrowers can cover with their savings. The number of months of PITI house payments (principal, interest, taxes, insurance), plus any PMI or homeowner association fees, needed in reserves after loan closing depends on many factors. For a jumbo loan, some lenders may require reserves of three to 24 months of housing payments.
You don’t necessarily need to have all the money in cash. Part of mortgage reserves can take the form of a 401(k), stock portfolios, mutual funds, money market accounts, and simplified employee pension accounts.
Also, depending on the loan program, a lender may be comfortable with lower cash reserves if you have a high FICO® score, low DTI ratio, or a high down payment.
• Documentation. Lenders want a complete financial picture for any potential borrower, and jumbo loan seekers are no exception. Most lenders operate under the “ability to repay” rule, which means they must make a reasonable, good-faith determination of the consumer’s ability to repay the loan according to their terms. Applicants should expect lenders to vet their creditworthiness, income, 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 jumbo loan rates fluctuate with market conditions. Lately, jumbo mortgage rates have been similar to those of other mortgages and sometimes even lower.
Because the absolute dollar figure of the loan is higher than a conforming loan, it is reasonable to expect closing costs to be higher. Some closing costs are fixed, such as a loan processing fee, but others are tiered based on the purchase price or loan amount, such as title insurance.
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.
Because of the more stringent requirements, jumbo loans may be more accessible for borrowers with higher incomes, strong credit scores, modest DTI ratios, and plentiful 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.
Lender requirements vary, so if you’re seeking a jumbo loan, you may want to shop around to see what terms and interest rates are available.
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.
What About Refinancing a Jumbo?
After you’ve gone through the mortgage and homebuying 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 your personal situation or mortgage interest rates have improved.
Refinancing a jumbo mortgage to a lower rate could result in substantial savings. Since the initial sum is so large, even a change of just 1 percentage point could be impactful.
Refinancing could also result in improved loan terms. For example, if you have an adjustable-rate mortgage and worry about fluctuating rates, you could refinance the loan to a fixed-rate home loan.
Recommended: Guide to Buying, Selling, and Updating Your Home
What’s the skinny on jumbo loans? You could call jumbo mortgages nonconformists: They exceed government limits for conforming loans. Luxury-home buyers and house hunters in expensive counties may turn to these loans, but they’ll have to clear the higher hurdles involved.
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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