Although jumbo mortgages are designed to help buyers purchase homes with heftier price tags, there are reasons for setting limits on a jumbo loan.
In most cases, jumbo loans are used by qualifying home buyers with strong financial health, reliable income, good to excellent credit, and cash reserves to buy higher-cost homes.
Depending on the home-buyer’s location, a jumbo loan could be your only possibility of homeownership in a high-cost area.
What is a jumbo loan?
A jumbo loan is a mortgage loan aimed at helping borrowers buy homes priced above Federal Housing Finance Agency (FHFA) limits—often called “conforming loan limits.” It’s not uncommon to see jumbo loan amounts up to $3 million USD .
For most counties in the United States, the 2022 conforming loan limit is $647,200 for a single-family home.
However, in some higher-cost markets, like those in Alaska, New York, California, San Francisco, the U.S. Virgin Islands, or Hawai’i, the FHFA allows loans up to $970,800.
What is the jumbo loan limit for 2022
Unlike conventional loans, which are bound by the FHFA ceiling, jumbo loans are not limited by a preset dollar amount. Instead, lenders can decide on the upper jumbo loan limit for 2022 and beyond.
Lenders do this through careful underwriting to evaluate a borrower’s ability to repay the loan amount.
Fannie Mae and Freddie Mac help reduce the risk lenders face for most mortgages in America. But because Fannie Mae or Freddie Mac won’t buy or guarantee a home loan that exceeds the conforming loan limit, lenders assume an increased risk with non-conforming or jumbo loans.
As a result, jumbo loans tend to require larger down payments, better credit scores, and bigger cash reserves from interested borrowers.
How do jumbo loans differ from other loans?
One of the ways jumbo loans differ from conforming loans is eligibility—jumbo loans tend to have more stringent eligibility requirements.
By comparison, conforming loans are generally easy for borrowers to qualify for because of their ties to Fannie Mae and Freddie Mac.
Jumbo loan eligibility requirements can vary significantly from lender to lender since Fannie/Freddie guidelines or limits do not apply.
The main differences between conforming and jumbo or non-conforming loans typically include:
Conforming loans (Fannie Mae, Freddie Mac)
- Minimum down payments as low as 3% for mortgages with private mortgage insurance (PMI); conforming loans without PMI require a 20% down payment
- Debt-to-income ratio (DTI) usually around 48%-50%
- Minimum credit score of 620 is commonly required
- Mortgage insurance is mandatory for mortgages with less than a 20% down payment
- Loan limits are determined by the FHFA and adjusted annually
Non-conforming jumbo loans
- Minimum down payments often range between 10% and 30% of the home value
- Debt-to-income ratio (DTI) typically between 38% and 43%
- Minimum credit scores can vary from lender to lender but are generally between 700 and 720
- Mortgage insurance requirements vary by lender
- Lenders determine loan limits—which can be in the millions—and can vary depending on which lender you choose
Archana Pradhan, an economist with CoreLogic, found that jumbo loan borrowers had credit scores an average of 26 points higher than those holding conforming loans and a DTI ratio two percentage points lower than their conforming loan counterparts.
What are jumbo loan requirements?
Because mortgage lenders determine eligibility requirements for jumbo loans without input from the FHFA, Fannie Mae, or Freddie Mac, it’s worth shopping around and contacting several lenders to get the specifics you could be required to meet.
Financial requirements
In general, however, there are typical qualifications most borrowers can expect to meet when applying for a jumbo loan.
For example, in addition to higher credit scores, bigger down payments, and lower DTI ratios, interested borrowers are often required to have cash reserves equal to a year’s monthly mortgage payments.
Timeframes
Jumbo loans also require patience.
Because applications are typically underwritten manually, they frequently have a longer processing timeframe than conforming loans that use automated underwriting systems.
Not just for repeat homebuyers
First-time homebuyers who meet the eligibility requirements have just as much ability to be approved for a jumbo home loan as a conforming loan.
Are jumbo loan rates higher?
Because Freddie Mac and Fannie Mae don’t guarantee jumbo loans, mortgage lenders take more of a risk with jumbo loans than conforming loans.
This, plus the bigger loan amount, means lenders take a more significant financial hit if you can no longer make loan payments.
Sometimes, jumbo loans have higher interest rates allowing lenders to offset some of these risks.
What are jumbo loan down payments?
Borrowers with a strong credit score and access to cash reserves can often secure a jumbo loan with a 5% or 10% down payment.
However, jumbo loans generally require larger down payments because of the added risk, and borrowers must also show they can afford the higher monthly mortgage payments.
Additionally, borrowers interested in jumbo mortgage loans can expect higher mortgage rates than conventional mortgages.
How can I apply for a jumbo loan?
Getting pre-approved for your jumbo home loan is an important step in your home buying journey.
Your mortgage pre-approval letter not only confirms how much your lender is willing to let you borrow but also demonstrates to home sellers that you are a qualified, serious buyer.
This can be crucial in high-cost areas where sellers may be worried a buyer isn’t financially capable of following through on the purchase.
Lenders generally evaluate many of the elements needed to qualify for a loan when deciding whether to issue a mortgage pre-approval letter, including:
- assets, such as cash, stocks, bonds, real estate, etc.
- income, debt, and how much of a loan a borrower can realistically repay
- credit history and credit score
Your credit history plays a dual role when it comes to mortgages. It not only helps lenders assess creditworthiness, but it is also a factor in determining the mortgage interest rate you’ll be eligible to receive—the better your credit, the lower the interest rate.Reach out to the mortgage loan officers at AAA Banking today if you’re thinking about jumbo financing or have additional questions about what loan products you may qualify for.
Photo by Scott Webb.