Luxury Home Financed With Jumbo Loan

Jumbo Loans: Guide For Home Buyer

8 minute read November 10, 2021

If you’re buying an expensive home, you may have trouble qualifying for a mortgage. After all, conforming loans can only be used for mortgages up to a certain amount.

That’s where jumbo loans come in. A jumbo loan is one that exceeds the limit for a conforming loan, and therefore can’t be purchased by Fannie Mae or Freddie Mac. And while jumbo loans may be harder to qualify for, they’re still available through many lenders.

Keep reading to learn what a jumbo loan is, the requirements for a jumbo loan, and who one might be right for.

What Is A Jumbo Loan?

A jumbo loan is a type of mortgage that exceeds conforming loan limits, which are determined by the Federal Housing Finance Agency (FHFA). Jumbo mortgages are a popular financing option for borrowers looking to purchase expensive homes.

Jumbo loans cannot be bought by Fannie Mae and Freddie Mac. These government-sponsored enterprises were created by Congress to provide stability and liquidity to the housing market by purchasing mortgages from lenders. Only conforming loans — or those that fall within the conforming loan limits — can be purchased by them.

Understanding Loan Limits

Each year, the Federal Housing Finance Agency (FHFA) sets limits on conforming loans. These limits represent the maximum loan amount for a mortgage that can be bought by government-sponsored enterprises Fannie Mae and Freddie Mac.

The FHFA updates its conforming loan limits each year to reflect changes in the average U.S. home price. In 2021, the maximum conforming loan amount for a one-unit property is $548,250. The FHFA also sets a higher limit for high-cost-of-living areas. The limit in those areas is $822,375, which is 150% of the normal conforming loan limit.

Any loan amount above that area’s conforming loan limits is considered a jumbo loan. Because Fannie Mae and Freddie Mac can’t purchase these loans, they’re often considered riskier for the lender and, therefore, may have tougher eligibility requirements.

Jumbo Loan Rates

Like conforming loans, jumbo loans come in a variety of forms, including both fixed-rate and adjustable-rate loans. And as with conforming loans, the type of mortgage you choose will impact your rate.

Historically, jumbo loans have had higher interest rates than conforming loans to account for the increased risk the lender takes on. But in recent years, the gap between jumbo and conforming loan rates has narrowed. In fact, jumbo loans today have rates that are quite competitive with other mortgages. Often the difference is anywhere from 0.25% to 1%.

You might be wondering why jumbo loans don’t have significantly higher rates if they present more risk to the lender. While these loans can’t be purchased by Fannie Mae or Freddie Mac, they can still be securitized and sold on the secondary market, which gets it off the originating bank’s books.

As with other types of loans, the interest rate on a jumbo loan will depend on a variety of factors, including the loan amount, size of the down payment, and creditworthiness of the borrower.

Jumbo Loans Vs. Conforming Loans

A conforming loan is one that meets the requirements set forth by the FHFA, Fannie Mae, and Freddie Mac. In other words, it is any loan that can be purchased by Fannie Mae and Freddie Mac.

While the FHFA limit is one of the requirements that a loan must meet to be considered conforming, it’s not the only one. Conforming loans must also meet certain requirements when it comes to their credit score, debt-to-income ratio, down payment, and more.

Because jumbo loans don’t meet the FHFA limits, they are always considered non-conforming loans. But even some loans that do fall within the FHFA limits may also be non-conforming if they don’t meet Fannie Mae and Freddie Mac’s other borrower requirements. Like jumbo loans, these other non-conforming loans may have stricter eligibility requirements, as they present a greater risk to the lender.

While discussing the difference between jumbo and comforming loans, we should also discuss how they compare to conventional loans. While the terms conventional and conforming loan are often used interchangeably, they aren’t the same thing.

A conventional loan is any loan that isn’t backed by a federal government agency such as the FHA, VA, or USDA. While many conventional loans are also conforming loans, a jumbo loan or another non-conforming loan could also be a conventional loan if it’s not government-backed.

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Types Of Jumbo Mortgages

The term jumbo loan can describe any mortgage that exceeds the FHFA conforming loan limits. But even within that definition, there are several different types of jumbo loans. Below we’ll dive a bit further into the different types of jumbo loans and who they might be for.

Conventional Jumbo Loan

Most often, jumbo loans are conventional mortgages that individuals use to purchase a home. Jumbo loans to purchase a primary residence are available through many of the same lenders of conforming loans. However, given the larger loan amount and the fact that they can’t be purchased by Fannie Mae or Freddie Mac, they have different requirements than conforming loans. We’ll share more about the jumbo loan requirements below.

VA Jumbo Loan

While most jumbo loans are conventional loans — meaning those not backed by the federal government — it is possible to borrow a jumbo VA loan. A VA loan is insured by the Department of Veterans Affairs. These loans are available to military veterans and service members who meet certain eligibility requirements. Like other jumbo loans, they allow borrowers to take out a loan that exceeds the FHFA conforming loan limits.

Home Refinance

In addition to using a jumbo loan to buy a home, a borrower can also use a jumbo loan for a home refinance. A refinance loan replaces a borrower’s original mortgage and is often used to get a lower interest rate, especially in a low-rate environment like we have today. The requirements for a jumbo loan refinance are similar to those of a jumbo loan used to buy a home.

Cash-Out Refinance

In addition to a regular home refinance, you may also use a jumbo loan for a cash-out refinance. A cash-out refinance is one where you take out a new mortgage for more than your original loan amount and get the difference in cash.

You generally can’t borrow more than your home is worth, so the cash you receive is secured by your home, just like the rest of the loan. Lenders usually require you to maintain a certain amount of equity in the home during a cash-out refinance, so they won’t be available to all homeowners.

Jumbo Loan Qualifications

As we mentioned, jumbo loans are subject to different eligibility requirements than conforming loans. Rather than meeting the requirements set forth by the FHFA, Fannie Mae, and Freddie Mac, they have requirements set by the individual lender. Below are some of the eligibility requirements of a jumbo loan.

Credit Score

The credit score requirements for a jumbo loan are often stricter than those for a conforming loan. While you can often qualify for a conventional conforming loan with a credit score as low as 620, lenders often require scores of 700 or higher for a jumbo loan.

Debt-To-Income Ratio

Your debt-to-income (DTI) ratio is the percentage of your monthly income that goes toward debt. There are two ratios that lenders consider. Your front-end DTI is the percentage of your monthly income that goes toward just your housing costs. Your back-end DTI is the percentage of your monthly income that goes toward your housing costs and all other debt combined.

Your DTI is important for several factors, including how much loan you qualify for. Lenders often require a back-end DTI of 43% - 45% to qualify for a jumbo loan.

Cash Reserves Or Liquid Assets

Lenders like to see that borrowers have some cash reserves in the bank, especially for jumbo loans that are for larger amounts, and therefore have larger monthly payments. Depending on your lender, you may be required to have 6-12 months of cash reserves to qualify for a jumbo loan.

Type Of Real Estate

Lenders may limit the type of property you can buy with a jumbo loan. Certain lenders may only allow jumbo loans for the purchase of a primary residence, while others may allow jumbo loans for investment properties and second homes. It’s important to note that multi-unit homes have higher conforming loan limits, meaning a jumbo loan may not be necessary.

Multiple Appraisals

No matter what type of loan you get, your lender is likely to require a house appraisal to ensure they aren’t lending you more than the home is actually worth. In the case of jumbo loans, lenders often require more than one appraisal.

Closing Costs

Closing costs are fees and expenses that borrowers pay at the time of closing to cover many of the administrative costs that go into a home purchase. Because a jumbo loan has different requirements than a conforming loan, lenders may also charge higher closing costs.

Down Payment

When you buy a home, lenders require that you put down a certain percentage of the purchase price as a down payment. For a conforming loan, required down payments can be as low as 3% (though it may be higher depending on your credit score). In the case of a jumbo loan, a lender will require at least 10%, and often 20% or more.

Proof Of Income

No matter what type of mortgage you get, your lender wants to be sure you have a reliable income to make your monthly payments. Lenders often require two years of tax returns or W-2 forms. Proof of income is especially important for a jumbo loan, which requires a large monthly payment.

When A Jumbo Mortgage Works

A jumbo loan is an important tool that allows borrowers to buy homes for more than the FHFA conforming loan limit. If it weren’t for jumbo loans, no one would be able to borrow more than $548,250 — or $822,375 in high cost of living areas — for a home. And in some parts of the country, that would leave many borrowers out of luck due to rising home prices.

A jumbo loan is well-suited to borrowers who want to buy a more expensive home. Borrowers of jumbo loans are usually high-income individuals, which allows them to meet the DTI requirements for these loans. They’re only appropriate for people who believe their income will remain high for the foreseeable future so that they’ll be able to afford the monthly payments.

When A Jumbo Mortgage Doesn’t Work

While jumbo loans can be a useful tool, they aren’t right for everyone. First, many people simply won’t qualify for this type of loan. As we’ve discussed, jumbo loans have stricter eligibility requirements than many borrowers won’t meet.

Additionally, jumbo loans aren’t appropriate for borrowers without a reliably high income. Even if your income is high in the current year, you shouldn’t borrow a jumbo loan unless you expect it to stay that way. Otherwise, you may end up defaulting on your home in the future.

The Bottom Line: Is A Jumbo Mortgage Right For You?

A jumbo loan is a type of mortgage that exceeds the conforming loan limits set by the FHFA. While these loans are less common than conforming loans, they’re a useful tool to high-income borrowers or those in high cost of living areas like Hawaii or California.

As with any mortgage, it’s important to consider how a jumbo loan will affect your finances. You should make sure the monthly payments would fit comfortably within your budget. If you aren’t sure how much you can afford to spend on a home, visit the Rocket Homes℠ home affordability calculator.

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