If your mortgage loan is high enough that it falls above the limits set by the Federal Housing Finance Agency (FHFA), it’s a jumbo loan. This means that your lender can’t sell the loan to Fannie Mae and Freddie Mac for added security so it will come with some extra scrutiny during the underwriting process. Usually, jumbo loans are used to buy more luxury real estate, but they are more and more common in highly competitive markets where single-family home prices are soaring. Here’s what you should know if you need to take out a jumbo loan to buy a home.
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Jumbo loans at a glance:
- The conforming loan limit is raised every year to keep up with the real estate market
- In 2022, the limit for a conforming loan was raised to $647,200 which means that anything above that limit is a jumbo loan
- Jumbo loans don’t necessarily require higher interest rates or down payments
- You will need a low debt-to-income ratio to qualify for a jumbo loan
How a jumbo loan works
Since your bank can’t sell a jumbo loan on the secondary market to government-backed entities Fannie Mae and Freddie Mac, it means more financial risk to them to give you one.
So if you want a home that costs significantly more than half a million dollars, you’ll likely need to take out a jumbo loan, especially if you don’t have a lot of cash to use on a down payment. It’s not a good or bad thing to use a jumbo loan, but it does mean more financial risk to the lender so they’ll be more stringent during underwriting.
The amount for a jumbo loan is $647,200 in most areas of the country. But there are certain high-cost areas, like Seattle and the Bay Area, that have higher conforming loan limits. High-cost areas are counties or census areas where the local median home value is more than 115% of the baseline conforming loan limit. These higher limits are known as High Balance loan limits.
How to qualify for a jumbo loan
Because jumbo loans are riskier than conforming loans, jumbo lenders make their approval requirements much stricter. You’ll need a higher credit score, more cash in the bank for your reserves, and other criteria that communicate to the lender that you are not likely to default on your mortgage. These heightened requirements generally make jumbo loans much more difficult to qualify for than conforming loans.
Your jumbo loan lender will likely require you to have a high credit score of at least 700. The higher your credit score, the better your chances of landing a jumbo loan.
Debt to income ratio (DTI):
You will likely be denied a jumbo loan if you’re already saddled with enough debt to make taking on another large debt risky to you and the bank. Try to hit at least 45% DTI before applying.
Down payment percentage:
Jumbo loans don’t require a larger down payment than conforming loans, but just like with conforming loans, the more money you have toward your down payment, the better the terms of your loan will likely be.
Most lenders like to see that you have enough cash on hand to cover at least 6-12 months’ worth of your mortgage payments. With a jumbo loan, these payments will likely be a little higher than with a conforming loan.
For more information on conforming loan types, read our post on Common Loan Types.
Another way that jumbo lenders mitigate risk is by increasing their interest rates. You might find a jumbo lender quoting rates that are 0.25%-1.00% higher than what you are seeing for conforming loan amounts. However, it’s not a given that jumbo rates will be higher than conforming rates – some might even be lower. Be sure to get an official quote before making a decision on what company to use.
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Jumbo loan rates
Jumbo loans used to carry much higher interest rates than conforming loans but, over time, the rates have gotten more in sync. You won’t necessarily have to pay more for a conforming loan, but as mortgage rates rise, and the financial risk in the mortgage market increases, rate increases may outpace increases for a conforming loan again.
Plus, jumbo loans are usually more costly than conforming loans to originate. Underwriting, processing, and appraisal fees are all typically more expensive, so be prepared to see higher closing costs with a jumbo loan.
Who should take out a jumbo loan?
It depends. If you are considering a loan amount near the conforming limit, putting down a little extra to get your loan amount under the limit might make your mortgage experience a bit easier. If you are able to qualify for a jumbo mortgage and are comfortable with your quoted interest rate and closing costs, then we encourage you to go for it. It comes down to your unique financial picture, as well as your goals for the home.
Why take out a jumbo loan?
Rising home prices aren’t slowing down. Jumbo loans allow buyers in more competitive and expensive areas to take out loans for those homes that exceed the normal limit of a conforming loan. And since there aren’t necessarily higher interest rates or higher down payment requirements, jumbo loans don’t act all that differently than conforming loans. But it’s worth making sure that you have the finances required for such a purchase in the first place. Your lender will be extra careful when underwriting you to make sure you have the cash to cover the loan in the long-term.