Jumbo Loans

What is Jumbo Loans?

A jumbo loan, or jumbo mortgage, is a mortgage loan that exceeds the limits set by the Federal Housing Finance Agency (FHFA). Jumbo loans are called nonconforming loans because they do not conform to those limits.

Because these jumbo mortgages don’t have the guarantees that come with conforming loans, borrowers tend to be subject to greater scrutiny and may or may not higher borrowing costs. A jumbo loan may attract different investors than those who are typically into buying conventional mortgage bonds.

Requirements for Jumbo Loan

Like conventional mortgages, you can get jumbo loans in a variety of terms or repayment schedules, and they can be fixed-rate or adjustable-rate loans. However, jumbo loans work differently than conventional mortgages. These loans have stricter requirements than other types of mortgages, and you’ll have to meet very specific property type, down payment, credit score and debt-to-income ratio requirements to get one.

Property Types

You can buy various types of properties with a jumbo loan because there are no government restrictions on how you can use your jumbo loan. As long as you meet your lender’s other requirements, you can use most jumbo mortgages for primary residences, vacation houses and investment properties.

Down Payment

Jumbo loans typically have much higher down payment requirements compared to conforming loans. It’s common to see lenders require 20% down on jumbo loans for single-family units. You may also need a higher down payment for second homes and multifamily units. Finally, the down payment required is based on your loan amount and credit score as well.

Credit Score

Your credit score is a major factor when it comes to getting a jumbo mortgage. Your credit score is a numerical rating of how reliable you are as a borrower. Your score can range from 300 to 850, and several factors are evaluated to determine your credit score.

The precise credit score you'll need to qualify for a jumbo mortgage will depend on the lender and the loan terms. With a Jumbo Smart loan, the minimum requirement for a 30-year fixed on primary residences, vacation homes and investment properties is a 680 median FICO score, though this can vary up to 760 depending on the property type and what you're looking to try to do in your mortgage transaction. The minimum credit score for a 15-year fixed loan or a Jumbo Smart ARM is 700. 

Debt-To-Income Ratio (DTI)

Your debt-to-income (DTI) ratio compares how much money you earn versus how much debt you have. To find your DTI ratio, divide all of your required minimum monthly payments by the amount you earn before taxes.

For example, if you pay $1,000 a month in bills and you bring home $2,000 a month before taxes, your DTI ratio is 50%: $1,000 divided by $2,000.

A low DTI ratio is very important when you get a jumbo loan because it tells lenders that you will have enough cash flow to cover your mortgage payments. If you have a higher down payment or credit score, you may qualify for a jumbo loan with a higher DTI ratio.

Benefits of a Jumbo Loan

Jumbo loans makes home purchase possible in a high-price market. The good news is that these loans are getting easier to access online and qualify for. Jumbo loans are often manually underwritten. A finance expert will go through your credit report, assets and bank statements with a fine-toothed comb and bring to light any past missteps. 

It makes sense that lenders might charge higher interest rates on jumbo loans because, as mentioned before, there’s so much risk involved. However, market data suggests that interest rates on jumbo loans are very competitive with market rates. At today’s rates, the difference between conforming and nonconforming loans ranges from just 0.25% to 1%. In fact, some jumbo loans have rates that are lower than other mortgage loans.

Cons of a Jumbo Loan

When lenders are asked to assume greater risk, they’re going to be particular about who they lend to. 

Lenders May Require Cash Reserves

Lenders need to know that you can make consistent, regular payments on a jumbo loan. Your lender will ask you for bank statements to prove that you have money in the bank to keep up with payments. It’s not uncommon for lenders to ask jumbo borrowers to have up to 12 months’ worth of expenses in reserve before they can get a loan.

Having cash in your bank account isn’t the only way to meet reserve requirements. Lenders may consider up to 70% of your retirement account as well, so you don’t need to cash out all of your funds to meet the reserve rule. In some cases, business and gift funds may also go toward your reserve requirements.

Closing Costs Are Higher

Closing costs are usually in the 3% – 6% range of your total home value, but jumbo loans have much higher closing costs than conventional mortgages. On a $700,000 mortgage, you can expect to pay $35,000 – $53,000 in cash at the closing table.

Consistent Income

Lenders only offer jumbo loans to buyers who have a predictable and regular income. Lenders often ask to see up to 2 years or more worth of W-2s, tax documents and 1099s when you get a conventional loan. With a jumbo loan, your lender may ask for more documentation and proof that your income is unlikely to change after you get a loan.

Manual Underwriting

If you have a bankruptcy or foreclosure on your report, you’ll have a harder time getting a jumbo loan.