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What is a jumbo loan and am I eligible?

A jumbo loan is a large loan that requires excellent credit

Profile picture of Michele Lerner
by Michele Lerner Mortgage & Real Estate Contributing Editor
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A mortgage loan qualifies as “jumbo” when the amount is higher than conforming loans limits. Also commonly called nonconforming loans, jumbo loans are typically sought after by homebuyers who are financing in cities where housing prices have increased significantly and rapidly, according to Keena Maher, a branch manager at Waterstone Mortgage. Primary homes, as well as secondary or vacation properties, are eligible to be financed through jumbo loans.

Because nonconforming loans are riskier for the lender, the borrower will often have to pay higher interest rates or make a larger down payment. Keep in mind that the conforming limit is often set higher in counties with expensive housing, so you should check the limit in your area before you consider a jumbo or nonconforming loan.

What is a jumbo loan?

Any loan that is for a larger amount than conforming loan limits set by government-sponsored enterprises Fannie Mae and Freddie Mac is a jumbo loan. Even if the borrower has excellent credit, jumbo mortgages are a higher risk for lenders since they aren’t guaranteed by a government agency and can’t be purchased by government-sponsored enterprises.

How big is a jumbo loan?

In 2019, Fannie Mae and Freddie Mac set conforming limits at $484,350 for most of the United States. In areas with higher housing prices, like Washington, D.C., and San Francisco, a loan is considered jumbo if it exceeds $726,525, and loan limits can be even greater outside of the continental U.S., like in Alaska, Hawaii and Guam. Lenders set their own maximum jumbo loan limits, and so the highest amount that you’ll be able to get through a jumbo loan will be determined by a variety of factors.

How does a jumbo loan work?

Generally, you don’t apply for a jumbo loan—you apply for a mortgage loan, and if the amount you need is larger than the government’s conforming limits then your lender has to decide how much they can lend you without a government agency backing the loan. Jumbo loans are also sometimes called portfolio loans because the lender will keep the loan on their own books rather than selling it off, as lenders will do with most conforming loans.

In the United States, about
9% OF MORTGAGES
are jumbo loans

Private lenders evaluate the same eligibility factors for jumbo loans as they do for conforming loans, but often with stricter qualifying limits for credit scores, debt-to-income ratios and liquid assets. Lenders also evaluate your finances by looking at debts like student loans or your minimum monthly credit card payment. It’s always your responsibility to factor in your family’s monthly expenses relating to homeowners insurance, property taxes, utility bills, plus tuition payments, groceries and other regular expenses, and decide if the rates that come with your jumbo loan are a financially feasible option.

Jumbo loans inherently come with a bigger risk for a lender because they can’t be securitized, guaranteed or purchased by Fannie Mae or Freddie Mac, which is why jumbo loans sometimes come with higher rates for the borrower. Jumbo loans are generally available over 15- and 30-year terms with fixed or adjustable interest rates. Like all mortgages, monthly payments on a jumbo loan will depend upon three main factors:

  1. The dollar amount of the loan
  2. How many years are on the term
  3. Interest rates

Remember that the amount you need to borrow—not the total price of the house—determines whether or not you should consider a jumbo loan. Even if you qualify for a jumbo loan, it might not be in your best interest to take one out. If you’re able to make a slightly higher down payment on your dream home, you might be able to cover the rest with a conforming loan.

Jumbo vs. conventional loan

Jumbo loans and conventional loans are both issued by private lenders, and neither is insured by a government agency. The difference between a jumbo loan and a conventional loan is that a conventional loan meets conforming limits set by government-sponsored enterprises and jumbo loans do not. If a loan amount is larger the government’s conforming limits, then it can’t be securitized by Fannie Mae and Freddie Mac. Private lenders then must set their own rules and regulation in order to make a jumbo, or nonconforming, loan to borrowers.

The interest rate on a jumbo mortgage loan is usually higher than a conventional loan, though we’ve seen that gap close since 2010. Similarly, jumbo mortgage loans typically require a higher down payment, but some lenders are lowering their minimum down payments to be closer to that of a typical conventional or conforming loan.

Jumbo loan requirements

Jumbo loans were created for HENRYs, an industry acronym for “High Earner, Not Rich Yet.” So, to qualify for a jumbo loan, you’ll need a strong credit history and to currently be in a comfortable financial situation. Before anyone can get approved for a jumbo loan, lenders will want to make sure they meet the following basic credit, debt, income and down payment requirements:

  1. Good or exceptional credit score
    Every lender has different requirements for approving jumbo loan applicants, but generally lenders require a higher credit score for a higher loan amount. Some lenders require 680 as their minimum credit score for a jumbo loan, but most lenders want to see at least 700–720 credit score for a jumbo loan. The average qualifying credit score for a jumbo loan is about 740. If your score is lower than that, you should work on improving your credit score before you start comparing jumbo loan lenders.
  2. Low debt-to-income ratio
    A lot of jumbo loan lenders don’t like to see a debt-to-income ratio (DTI) higher than about 38 percent. You might qualify for a jumbo loan with a DTI up to around 43 percent if you have really great credit and can make a larger down payment. Jumbo loan debt-to-income ratios are more strict than conventional and conforming loans since jumbo loans are too big to be insured by the government.
  3. At least two years of steady employment
    A lender will need to verify your employment history before approving you for a jumbo loan even if you have perfect credit and a low DTI. Jumbo loan lenders usually like to see at least two years of steady employment with the same employer, but there are some exceptions.
  4. Proof of income
    Even after you prove you’ve been steadily employed for at least a couple years, you’ll have to validate your income for that time. Jumbo loan lenders usually require tax returns or W2s, plus bank statements or pay stubs, depending on who your employer is or if you are self-employed.
  5. Low loan-to-value ratio
    A loan-to-value (LTV) ratio around 20 percent will get you good rates on a jumbo loan, though you might be able to secure a jumbo loan if your LTV is slightly higher and you have an exceptional credit score. When lenders talk about LTV they are referring to the amount of a loan in relation to the value of assets purchased with the loan. Generally, the higher the LTV ratio on a loan, the riskier it is for the lender.
  6. A higher minimum down payment
    Jumbo loan minimum down payments vary by lenders but are typically higher than conventional and conforming mortgage loans. Many lenders require jumbo loan minimum down payments around 20 or 30 percent. Depending on your location, some lenders could allow 5 or 10 percent down payments, but that sometimes requires you pay a higher interest rate. You also may be able to “piggyback,” or combine two conforming mortgages and pay a lower down payment overall.

    Banks and mortgage companies will often correlate their financing limit to the total loan amount. For example, a lender might cap financing at 90 percent for $2 million jumbo loans and require a minimum down payment of at least 10 percent; $3 million jumbo loans might require a 20 percent minimum down payment.

  7. Meet jumbo loan limits
    The maximum amount that you’ll be able to borrow with a jumbo loan will be between you and your lender. Private lenders who issue mortgage loans that are too large to be guaranteed by the government (more than $484,350 in most of the U.S. or $726,525 in some high-cost counties) can set their own limits on maximum loan amounts for individuals and jumbo loan programs. Some jumbo loan programs have loan amount limits. For example, the Doctors Loan program is specifically designed for doctors to borrow up to $2 million dollars and require a down payment of just 10 percent.
  8. Have enough jumbo loan cash reserves
    Most lenders want their borrowers to have enough liquid assets to cover the loan obligations should they suddenly lose their job. Jumbo loan reserve requirements can vary between three months and two years, depending on your DTI and down payment. In addition to actual money in the bank, lenders consider percentages of investment and retirement accounts “liquid” as well. Most lenders will consider it a red flag if you can’t verify your assets or if questions come up about the source of your down payments.
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Jumbo loan pros and cons

Jumbo loans exist in what’s sometimes called a “fragmented market,” a marketplace where there isn’t a single company or agency with enough power to influence the industry in any one direction. Because of this, you can see quite a difference across lenders’ requirements and loan amounts, for better or worse.

Jumbo loan advantages

The most obvious advantage of a jumbo loan is access to a more substantial loan. For some prospective homeowners in expensive housing markets, a jumbo loan might be the only way to get the keys to their dream house.

Most mortgage experts don’t consider a jumbo loan necessarily more difficult to get than a conforming loan. Lenders actually have a lot of flexibility when it comes to baseline requirements since they are assuming the risk themselves. After the subprime mortgage housing crisis of 2007–2010 jumbo loan rates increased, but we’ve recently seen those rates go down significantly. In 2019, jumbo loan rates are sometimes lower than conforming rates for borrowers with exceptional credit scores and very low loan-to-value ratios.

As another plus, jumbo loans aren’t that much more complicated to understand than conforming loans. Most lenders will offer the same programs for their jumbo loans as they do for conforming loans, such as adjustable-rate or fixed-rate mortgages or interest-only home loans, and over similar terms.

Jumbo loan disadvantages

Jumbo loans aren’t for everyone. Since you can only get a jumbo loan from a private lender who takes on all the risk, the approval process for a jumbo mortgage is often more difficult than for a conforming loan. Often approval guidelines are more strict, so you’ll likely need a higher credit score and meet other more stringent qualifying requirements.

You’ll also have to make higher monthly payments on a jumbo mortgage loan—not just because of the higher total amount, but also if you’re paying a higher interest rate or Private Mortgage Insurance. This is because jumbo loans are not federally insured, and therefore the loan is riskier for the lender.

Another disadvantage of financing a house with a jumbo loan is that it could make the property more difficult to sell in the future since it required such a large loan in the first place. Plus, a jumbo loan comes with fewer tax benefits compared to conforming mortgages. The cap on mortgage interest deductions is $750,000, so it’s unlikely you’ll be able to get a significant tax break by taking out a jumbo loan if you live in a high-cost area, where prospective homes usually need jumbo loans the most.

Bottom line: Should I get a jumbo loan?

If you want a nice house in a pricey market and meet the eligibility requirements, a jumbo loan could be the right loan for you. The most important thing to remember is that jumbo loans were not created to help you push the limit of how much you can borrow. Rather, jumbo loans are available to creditworthy home buyers who want to invest in a house that’s more expensive than the average house in their area.

The total loan amount that a lender will be able to lend to any borrower will be determined by their credit score, current debts, assets and a variety of other personal financial factors. The best jumbo loan lenders will always offer competitive rates and employ knowledgeable loan offers who will help you decide if a jumbo loan is the best financial move for you to make.

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Profile picture of Michele Lerner
by Michele Lerner Mortgage & Real Estate Contributing Editor

Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time”, has been writing about personal finance and real estate for more than two decades. Michele writes for regional, national and international publications in print and online for a variety of audiences including consumers, real estate investors, business owners and real estate professionals.