Jumbo loans, or jumbo mortgages, are designed for financing properties that exceed the loan limits set by the Federal Housing Finance Agency (FHFA) for conventional mortgages. These loans are commonly used by borrowers in high-cost real estate markets where home prices surpass the maximum limits of traditional loans. Jumbo loans are a popular option for high-net-worth individuals and buyers who require larger loan amounts but do not have the liquidity to purchase a high-priced property outright. However, due to their size and lack of government backing, they come with stricter credit requirements and often require a more substantial down payment.
Jumbo Loan Essentials
Jumbo loans are home mortgages that exceed the limits of a conventional mortgage, as set by the Federal Housing Finance Agency (FHFA). Fannie Mae or Freddie Mac cannot guarantee, purchase, or scrutinize them.
Unlike conventional mortgages, jumbo mortgages or loans are typically riskier as they lack the guarantee offered by Fannie Mae and Freddie Mac. However, that means that the lenders of jumbo loans are not protected from losses if the borrower defaults.
Because of this, borrowers of jumbo loans need to meet stricter credit requirements, such as a stellar credit score with a very low debt-to-income ratio.
While jumbo loans are considered non-conforming because they exceed the loan limits set by the Federal Housing Finance Agency (FHFA) and are not eligible for purchase by Fannie Mae or Freddie Mac, many lenders structure their jumbo loans to meet the guidelines of a 'qualified mortgage' (QM) under Regulation Z of the Federal Truth in Lending Act. However, not all jumbo loans meet QM standards. Qualified mortgages provide certain legal protections to lenders, making them more attractive, but jumbo loans can also be offered as non-qualified mortgages (non-QM), which may come with more flexible underwriting criteria but often carry higher interest rates.
What Is a Jumbo Loan?
A jumbo loan is when the loan exceeds the maximum limit for conventional loans as determined by the Federal Housing Finance Agency (FHFA).
In 2024, the conforming loan limit for single-family homes in most areas of the U.S. will be $766,550, with limits increasing to $1,149,825 in higher-cost areas.
Qualification Requirements
Jumbo loans are specialized and riskier lending options that require stricter underwriting criteria than conventional loans. Because they don't conform to FHFA standards and involve more money, lenders often set their qualification requirements.
Here are some key requirements:
- Down Payment: Down payments for jumbo loans typically start at 10%, but they may range from 5% to 30% depending on the lender and the borrower's financial profile.
- Credit Score: Lenders may require a credit score of 700 or 760 to get approved for jumbo loans. Like any home loan, a higher credit score can be beneficial.
- Debt-to-Income Ratio: Lenders require a lower debt-to-income ratio to ensure the borrower has sufficient income or assets to cover the loan. While most lenders require a DTI of 43%, they may allow flexibility if the borrower has plenty of cash and solid financials.
- Income and Cash Reserves: Lenders may require borrowers to demonstrate sufficient income and a healthy cash reserve. Most borrowers will need provable liquid assets and enough cash reserves to cover six months to one year of mortgage payments.
- Documentations: Borrowers must provide more extensive financial documentation than is required for a conventional loan, including bank statements, tax returns, W-2s, and 1099s. Since jumbo loans typically require manual underwriting, a human underwriter often reviews these documents.
- Appraisals: Lenders typically require at least one appraisal to determine the property's value, ensuring it justifies the loan amount. For higher-risk or more expensive properties, some lenders may require two appraisals to verify the property's worth and mitigate their risk.
Advantages and Drawbacks
Advantages:
- Higher Loan Limits: Jumbo loans allow borrowers to take out a mortgage that exceeds the FHFA limits.
- Interest Rates: Jumbo loans often come with higher interest rates than conforming loans, though competition among lenders can sometimes result in favorable rates for well-qualified borrowers.
- Ability to Borrow More: Jumbo loans provide the opportunity to afford more expensive properties.
- Loan Options: Various types of jumbo loans are available, depending on loan terms and whether they are fixed or variable. Veterans or active service members may qualify for a VA jumbo loan.
Drawbacks:
- Larger Down Payments: Jumbo loans generally require a down payment of at least 10%.
- Higher Fees and Closing Costs: Jumbo loans can involve higher fees and closing costs due to the extra qualifying steps and larger loan amounts.
- Riskier Option: Jumbo loans can be riskier without the regulatory protections of conventional loans.
Takeaway
Jumbo loans are a type of mortgage financing that exceeds the government-set limits for conventional loans. They often come with more rigorous credit requirements, a high credit score, and a low debt-to-income ratio. These loans are popular among high-income individuals who may choose not to pay for a high-priced home in cash, preferring instead to finance the property and preserve their liquidity for other investments.