A Guide To Jumbo Construction Loans And How They Work

If you dream of building a large home, a jumbo construction loan may be in your future. Jumbo construction loans are designed to finance constructing a new home up to a certain threshold.

They're related to a jumbo loan, a type of mortgage loan that exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA). Government-sponsored enterprises Fannie Mae and Freddie Mac can only purchase mortgages that conform to these limits. (We'll get into that more in a second.)

Do you think you might need a jumbo construction loan? Let's go over the details, including how they work and the requirements for getting a jumbo construction loan.

What Is A Jumbo Construction Loan?

Construction loans fund building residential (stick-built) homes, from land purchase to the finished product. They usually come in two forms:

• Standalone construction loan: A short-term loan that finances the building phase; borrowers get a separate mortgage loan once the principal comes due.
• Construction-to-permanent loan: The construction loan converts to a mortgage after construction.

A jumbo construction loan is unique compared to traditional construction loans because it is a loan that sits above the conforming loan limit.

The conforming loan limit for mortgages that Fannie Mae and Freddie Mac can acquire in 2024 is $766,550 for one-unit properties, an increase of $40,350 from 2023. In high-cost areas, such as Alaska or Hawaii, the limit is $1,149,825 for one-unit properties.

How Do Jumbo Construction Loans Work?

A jumbo construction loan works like this:

1. Application process: You, the borrower, apply for a loan through a lender and can get prequalified based on your credit history, income, cash reserves and liquid assets, and debt-to-income ratio (DTI). Your DTI is the relationship between the debt you owe and the income you bring in every month.
2. Approval for the loan: Once you've applied and done your homework on the cost to build a house, your lender approves you for the construction loan based on loan limits.
3. Construction phase: While your builder constructs the home, you make interest-only payments, typically for 6 to 12 months – however long construction takes.
4. Conversion to a mortgage: When construction ends, the loan converts to a standard mortgage loan. Learn the differences between 15-year versus 30-year mortgages to choose the right loan amount option for you.
5. Repayment: You then begin making full principal and interest repayments. Your lender will communicate how to make your first payment and give you your payment method options.

Jumbo Construction Loan Rates

Current jumbo construction loan rates depend on the lender you choose. Every lender offers slightly different interest rates, so it's important to reach out to several lenders before you land the right one.

Jumbo construction interest rates are often higher, meaning borrowers may pay more over time. Compared to conventional construction loan rates and conventional loans, you may pay more in interest with a jumbo construction loan/jumbo loan combination.

Requirements For A Jumbo Construction Loan

Jumbo loan lenders generally ask borrowers to meet the following requirements, but every lender is different – check with your lender for details:

• A down payment up to 20-30%
• Minimum 680 credit score; may require a 700 credit score
• 2% – 6% in closing costs
• Debt-to-income ratio of 45% or lower

Why do they have more substantial requirements? They do simply because these loans are riskier for your lender, because Fannie Mae and Freddie Mac do not guarantee them.

Your lender will also want to know the builder or contractor you plan to work with to complete your project. Lenders will also want to see project plans and cost estimates from the contractor or builder to see the costs in writing.

How To Get A Jumbo Construction Loan

Borrowers who think they need a jumbo construction loan can start looking for a mortgage lender that offers jumbo construction loans. Research local banks and credit unions to determine whether they offer jumbo construction loans.

Next, apply for preapproval and provide the lender with financial information and other requested documents, such as bank statements and tax returns. Ensure you have specifications and building plans in hand.

Next, hire a licensed and insured contractor to do the work – your lender will also want to know the contractor's name. Look into home builder associations or ask for referrals from friends and neighbors who have completed the building process.

Once all of this is complete, submit an official loan application to your lender. After you apply, your mortgage lender will review your request.

FAQs: Jumbo Construction Loans

Still have some details on your mind? Let's look at some frequently asked questions about jumbo construction loans.

Should I get a jumbo construction loan?

Getting a jumbo construction loan is a personal decision. They aren't right for every borrower, but if you meet the down payment, credit score, closing cost and DTI requirements, a jumbo construction loan for building your dream home might fit your needs. Before you build, talk with your lender for more information and compare other options (such as conventional loan costs and requirements).

What’s the difference between a construction loan and a renovation loan?

Construction loans are short-term loans that finance any costs associated with a new home build, from purchasing the land to painting the home. On the other hand, a home renovation loan finances home repairs, renovations and remodels. It might be as simple as updating a half bath or adding a new wing to your home.

What types of projects qualify for a jumbo construction loan?

Projects can include single-family homes, planned unit developments, site condominiums and modular construction. However, approval for project type depends on the lender. Talk with your lender to ensure you're getting the right financing for your project.

What are the risks of getting this type of loan?

Jumbo loans are a credit risk to lenders because of the high loan amount and the fact that the bank cannot resell the loan to be repackaged as a mortgage-backed security. The bank will then charge a higher interest rate for a risk of default, meaning you will pay more in interest on both the jumbo construction loan and the jumbo loan.

What happens to my loan if I have construction delays?

You can modify the loan if construction delays crop up. Your lender will want to hear about your builder's progress on the home, so be as communicative and transparent as possible, and communicate regularly with your builder.

The Bottom Line

Jumbo construction loans may fit your specific situation if you plan to build a home above the conforming loan limit for mortgages repackaged, bought and sold as mortgage-backed securities. If the cost of the home build exceeds $766,550, or in a high-cost area, $1,149,825, you may need a jumbo construction loan. Be sure you understand how they work, compare interest rates and learn how to get one.

Talk to your lender to learn more about jumbo construction loans and whether it's right for you. Ready to build your dream home? Start the application process today.