What do sprawling McMansions, dream homes decked out with custom-designed features, and beautiful properties in some of the most lucrative parts of the U.S. all have in common? They’re expensive to buy, making their homebuyers the most likely candidates for jumbo loans.
The median price for a single-family home in 2023 is expected to reach $385,000, according to estimates from the National Association of Realtors. That’s a hefty – but feasible – sum to manage.
However, homebuyers in the likes of California, New York, and D.C. may be battling home price tags of over $800,000 on average! Homes in the nation’s capital clock in at an average of $769,351 with another $29,888 dedicated to closing costs, 2022 CoreLogic data suggests, while homes across California and New York range from $1.1 million to as high as $1.35 million.
Conventional mortgages won’t cover these enormous price tags, but jumbo loans can.
If you’re a homebuyer about to make a big-ticket real estate purchase, here’s everything you need to know about jumbo loans, how they differ from conventional mortgages, and what to do to make sure you qualify for these gargantuan mortgages.
What are Jumbo Loans?
Jumbo loans are non-conforming loans, which means they do not adhere to the “conforming” guidelines and standards set by Fannie Mae and Freddie Mac, alongside the annual regulations set out by the Federal Housing Finance Agency (FHFA).
While most homebuyers seek out conforming loans, jumbo loans are one of a few non-conforming options to help specific homebuyers with their niche need (which, in this case, is buying an expensive chunk of property)!
Each year, the FHFA dictates the loan limits for conventional loans. In 2023, the maximum loan limit is $726,200, an increase of $79,000 from 2022’s $647,200.
If you’re in a “high-cost” area, in which local county median home values exceed the baseline limit, the ceiling loan increases to $1,089,300, or 150 percent of the initial limit. Alaska, Hawaii, Guam, and the U.S. Virgin Islands follow special statutory provisions – wherever you are in these regions outside of the continental U.S., homebuyers there can seek out conventional loans capping at $1,089,300, too.
If you’re buying a property with a price tag that exceeds the baseline limit and your new home isn’t in a high-cost area, you’ll need to secure a jumbo loan instead to get the financing you need.
How do Jumbo Loans Work?
Consider jumbo loans the Wild West of home financing. They don’t have rigid parameters to work with, such as loan amount limits and uniform requirements like other types of financing. But they do have some similarities to conventional loans.
What can I use jumbo loans for?
You can use jumbo loans to pay for a home purchase, including your primary residence, a vacation home, or investment property.
If the price tag for your dream home falls out of the scope of a conventional loan, these larger-than-normal loans can cover your bases to help you make your home purchase. It’s why these loans were created – to help homebuyers buy luxury properties and houses in hot real estate markets.
What are the loan limits?
Your state, county, and, lender determine how much you can borrow for a jumbo loan – and the criteria for qualifying. There is no national one-size-fits-all playbook – one lender may cap their jumbo loan offerings at $2 million, while others may let the qualifying borrowers take out financing of up to $10 million.
Your job is to look at the state you’re buying property in and zero in on what the maximum loan limits are for both conventional and jumbo loans in that area, including your local county. Hawaii and Alaska are the only two states where the jumbo loan limit is the same wherever you go.
What are the terms of the loan?
Just like with conventional loans, you can choose between a fixed or variable interest rate for your jumbo loan.
Again, like a conventional mortgage, you can choose your term options, too, signing up for a 10-year loan, a 20-year loan, or even a 30-year loan, for example.
What are the interest rates on jumbo loans?
You can count on rates for jumbo loans to fluctuate – at times lower or higher than conforming loans.
Take control of the situation by getting your financial profile in great shape. Ultimately, it’s your credit score, down payment, savings, and financial reliability that will dictate the interest rate you’re offered.
Show lenders you have a solid history of managing your debts, plenty of savings and assets to turn to, and a steady source of income.
Can borrowers refinance jumbo loans?
As long as you meet your lender’s current eligibility requirements, you should be able to refinance your jumbo loan.
How do I pay off my jumbo loan?
Aside from the sizeable loan, jumbo mortgages aren’t that different from traditional ones. Once you’ve gone through the application process and closed on your new home, you’ll find managing your mortgage payments, setting a schedule, and refinancing your loan are generally the same as a conventional mortgage.
How to Qualify for a Jumbo Loan
While conforming loans tend to have a strict qualifying set of criteria to meet, jumbo and non-conforming loans are more varied. There are no baseline requirements for credit scores, maximum loan limits, debt-to-income ratios, and down payments. Instead, this will depend on the lender and the program.
Expect a much harder time qualifying for a jumbo loan. You are, after all, asking your lender for a larger-than-normal mortgage. They need to know the funds they’re lending you are in safe hands.
These loans also undergo a much stricter underwriting process because they aren’t backed by Fannie Mae and Freddie Mac, with the risk falling solely onto your lender.
You will find jumbo loans typically have these baseline criteria you’ll need to meet:
- A strong credit score and great credit history. While conventional loans traditionally require a credit score of 620, lenders increase the threshold to about 700 up to 740 for jumbo loans. Because of this, make sure you’re paying your debts on time in the months leading to your jumbo loan financing.
- A low debt-to-income ratio. Debt-to-income ratio is the percentage of your gross monthly income that goes toward paying your existing debts. Before you make your case to lenders to ask for a jumbo loan, ensure the ratio isn’t any higher than 43 percent. The sweet spot is a DTI of about 36 percent or less. You want to show lenders you have more than enough income to dedicate to your supersized mortgage.
- A substantial down payment. While other non-conforming loans like Federal Housing Administration and Veterans Affairs financing require as little as 3.5 percent down, you’ll need to throw more skin in the game to get approved for a jumbo loan. The minimum down payment varies from lender to lender, but you should expect to apply at least 10 percent down. Aim for up to 25 percent down if you want to secure the lowest advertised interest rates. Essentially, you’re proving to lenders that you’re taking this loan seriously by pouring your savings into this home purchase. Aiming for a down payment of about 20 percent is worth your while: once you hit the 20 percent mark, you no longer need to pay for private mortgage insurance.
- A comfortable amount of savings. Down payment aside, your lender also wants to see cash savings of about six to 12 months of mortgage payments stowed away safely in the bank. This way, they know you have a rainy day fund to turn to in case you face financial woes. This is a tricky one to secure, especially after saving up a sizeable down payment, but it’s a great exercise to prepare you for the large loan you’re about to shoulder.
- Proof of employment and a steady income. When lenders underwrite your loan application, they will consider your employment history, including your salary, job stability, and whether you’re earning enough to feasibly take on this debt for the duration of your term.
- A two-step appraisal process. While most homes require a single appraisal to help your lender decipher the correct amount of financing, some lenders may insist on a second opinion before they dole out a massive loan to you.
What are the Pros and Cons of Jumbo Loans?
Jumbo loans are unique, helping homebuyers with the financing they need to borrow more than what’s allowed under mortgages backed by Fannie and Freddie.
Here’s a closer look at their key pros:
- They provide an opportunity to buy the home of your dreams or to get onto the property ladder in a city or county notorious for sky-high real estate.
- They come with competitive interest rates, especially for financially responsible applicants.
- They permit borrowers to take out more than what’s on offer via conventional loans.
However, you must tread carefully with these loans. Here’s why:
- They come with much higher debt to service, forcing you to commit to a gargantuan mortgage. Ideally, you have the savings and income to manage this debt in the long run.
- They’re harder to qualify for. As we mentioned above, your underwriter will scrutinize your income, credit score, savings, debt-to-income ratio, and more to decide if you can handle a jumbo loan.
- They require plenty of savings on your part. You’ll need a down payment, about six to 12 months of mortgage payments sitting in your bank account, and proof of a steady source of income to qualify. After that, you’ll need to keep your income flowing to stay on top of mortgage payments.
Is a Jumbo Loan Right for Me?
If your heart is set on buying a luxury home, a jumbo loan may be your only choice to help you finance your purchase. But securing the loan will be a daunting process you’ll need to figure out if you’ll get through successfully.
If you’re not sure you can meet these strict requirements or if you’re worried you won’t be able to manage this hefty mortgage in the long haul, pause on your purchase and the loan application process.
Ultimately, jumbo loans are earmarked for high-income earners who can comfortably service their mortgage payments. You should not be squeezing your budget to keep a roof over your head. However, if you can afford the loan and you can show lenders you’re a trustworthy borrower, a jumbo mortgage is a great tool to seal the deal on buying your dream home.
Carmen Chai is an award-winning Canadian journalist who has lived and reported from major cities such as Vancouver, Toronto, London and Paris. For NewHomeSource, Carmen covers a variety of topics, including insurance, mortgages, and more.