What Is A Jumbo Loan? Definition, Limits And Requirements

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 mortgage 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 Fannie Mae or Freddie Mac can’t purchase these loans, they can still be securitized and sold on the secondary market, getting them off the originating bank’s books.

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

As 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, jumbo loans have requirements set by the individual lender. These loans often have more complicated underwriting processes, too. Usually, a jumbo loan requires a finance expert to manually review a borrower’s financial history and assets.

Below are some of the eligibility requirements of a jumbo loan.

Credit Score

When seeking a jumbo loan, a higher credit score will likely help because the credit score requirements are often stricter than the requirements for a conforming loan. While you can often qualify for a conventional conforming loan with a credit score as low as 620, lenders sometimes require a score 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 influences several outcomes, 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 enough money to buy a home, especially for jumbo loans that are for larger amounts and therefore have larger monthly mortgage 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 only allow jumbo loans for the purchase of a primary residence, while others 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 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). With 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 2 years of tax returns or W-2 forms. Proof of income is especially important for a jumbo loan, which typically requires a large monthly payment.

A jumbo loan is an important tool that allows borrowers to buy homes for more than the FHFA conforming loan limit. Without jumbo loans, no one could borrow more than $766,550 – or $1,149,825 in high cost of living areas – for a home. And in some parts of the country, this would leave many borrowers out of luck due to rising home prices.

A jumbo loan is well-suited for borrowers who want to buy a more expensive home. Borrowers of jumbo loans are usually high-income individuals, so they can meet the DTI requirements for these loans. Jumbo loans are only appropriate for people who believe their income will remain high for the foreseeable future, allowing them to afford the monthly payments.

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 can be helpful for wealthy borrowers or those in particularly expensive places like Hawaii or California.

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