What is a jumbo loan?
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June 24, 2022

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What is a jumbo loan? What is a jumbo mortgage? Is there a difference? And how are they different from conventional loans?

Jumbo loans or jumbo mortgages are different names for the same type of loan that exceeds the Federal Housing Finance Agency (FHFA) limits. 

Conventional mortgages—the majority of mortgages approved across America—are guaranteed, securitized, or guaranteed by the government-supported companies Fannie Mae or Freddie Mac and abide by their conforming loan limit value.

This loan category has gained much traction in the housing market as the economy continues to recover after 2008. These financial products are tailored to finance luxury homes or properties usually found in high-competitive real estate markets. 

Every jumbo mortgage has unique underwriting requirements and tax rules, and the loan amount limits will vary from state to state and even from county to county.

What are the limits for conventional loans?

The FHFA will set the conforming loan limit size for different areas across the country every year.

For 2022, the purchase price limit was set to $647,200 for the majority of America, an increase of $98,950 over the 2021 home price limit of $548,250. 

However, if you are looking to live in high-cost areas with a higher home value like New York, then your baseline limit was set to $970,800 (about 1.5x the limit vs. the rest of the country).

Outside the continental United States, the FHFA has set different provisions for loan limit calculations. 

For example, the baseline limit for jumbo mortgages in the U.S. Virgin Islands, Hawai’i, Guam, and Alaska is set at the continental “higher home value” limit of $970,800. 

Plus, that baseline limit can be even higher in counties with higher home values.

How do jumbo mortgage loans differ from other loans?

The obvious key difference between jumbo loans and conforming loans is the amount of money involved. But there are more ways they differ.

Let’s look at how jumbo mortgages (nonconforming loans) compare to conforming loans.

More significant down payment requirements

Small down payments are not uncommon when dealing with conforming loans. 

But due to the amount of money involved in jumbo loans, lenders are likely to require a minimum down payment of 20% from potential homeowners.

However, some borrowers find lenders asking only 10%—but they are the exception, not the rule.

Slightly higher interest rates

Mortgage rates for jumbo loans will likely be slightly higher than standard loan interest rates.

This difference will depend on your financial situation and the lender. There is significant competition for your business, and some lenders might offer jumbo loan rates that are competitive with conforming home loan rates—or even lower. 

Overall economic and real estate market conditions will factor significantly for what’s available. As always, shop around for the best loan terms.

Expect higher closing costs

The loan amounts of jumbo mortgages are significantly larger and have some extra qualifying steps. Because of these factors, expect higher closing costs and fees.

Eligibility for a jumbo loan

The criteria for underwriting jumbo loans are more strict because of the higher risk to lenders and the more significant loan amounts.

Higher credit scores

Mortgage lenders often require that a borrower’s FICO score is higher than 700—maybe as high as 720 in some cases—for jumbo mortgage approval.

The debt-to-income ratio

When lenders evaluate your mortgage application, your debt-to-income ratio (DTI) becomes a significant factor. The extra attention to DTI is to ensure you won’t become over-leveraged.

Cash reserves can make a difference

Some lenders will have some flexibility with their DTI requirements if you have a lot of cash reserves. (Keep in mind that some other lenders, regardless of any cash reserves, will have hard caps of 45% DTI.)

It’s common for some lenders to ask jumbo mortgage borrowers to show if they have enough cash reserves to cover a full year of monthly payments (mortgage payments).

Documentation requirements

More extensive documentation might be needed for a jumbo loan than for a conforming loan. Have your complete tax returns, W-2s, and 1099s ready when applying, along with bank statements and investment account information.

Appraisals

A few lenders may need a second home appraisal done for the property you’re interested in buying.

What are the benefits of jumbo loan limits?

Jumbo loans enable borrowers to access loans with limits greater than those imposed by Fannie Mae and Freddie Mac. 

For example, if you were interested in borrowing $1 million for a home that costs $1.5 million, a jumbo loan is the most common way to make that possible.

Even if the borrower has the cash funds available to purchase the property outright, jumbo loans can help keep that cash available for other investments. 

Furthermore, the borrower can still get the home of their choice at a competitive interest rate.

The restrictions of a high-value housing market

Borrowers who want to own their homes in more expensive housing markets will likely have to turn to jumbo loans. 

For many areas of the country, the rise in real estate markets means many folks will have to apply for jumbo mortgages for even modest homes in the region.

If you need to find a home in a high-value housing market, one of your best options is to shop around lenders who offer jumbo loans. 

From adjustable-rate mortgages (ARMs) to 15 or 30-year fixed-rate loans, there are many variations of mortgages available.

How do jumbo mortgage rates compare?

Borrowers generally expect to find higher interest rates for jumbo loans because of the greater risk involved. Because of this, many homebuyers may not look beyond the higher rate they’re initially offered.

But market analysis suggests that many lenders offer very competitive interest rates for jumbo mortgages compared with conforming market rates. 

It’s not unheard of for the difference between nonconforming loans and conforming loans to be just a quarter of a percent. In fact, the interest rates from some lenders are even below other conventional mortgage loans.

Is a jumbo loan right for you? AAA Banking can help

The real estate market in your area of interest and your personal finances will be the most significant factors in whether a jumbo loan is the right mortgage for you.

But just like conventional loans or conforming mortgages, there are many more factors to consider with jumbo loans. 

Whether you’re refinancing for your second home or investment property, or a first-time homebuyer, AAA Banking will be there to answer your concerns and questions.

Connect with us, and together let’s discover if you could benefit from a jumbo mortgage to secure your dream house.

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