What to Know About a Jumbo Loan

If you want to buy a home, and the cost is over a certain amount, you may need a jumbo loan. In some areas, the limit for a jumbo loan is higher than others if it’s considered a place that’s more expensive than average to buy a home. 

For example, houses and townhomes for sale in Fairfax, VA, can easily be beyond the jumbo loan limit compared to other places. The loan limit for most places in Virginia is $647,200, but it can be as high as $970,800 in high-cost counties. 

The following are facts to know about a jumbo loan if you’re planning to buy a home in the near-term future. 

The Basics

A jumbo loan is a mortgage that’s used for financing properties too expensive for conventional conforming loans. As mentioned, the maximum amount for a conforming loan in the majority of counties is $647,200, as determined by the Federal Housing Finance Agency. If a home goes beyond the local limit for a conforming loan, then you would have to get a jumbo loan. 

This type of loan is a non-conforming conventional mortgage, making it riskier for a lender to finance because it can’t be guaranteed by Fannie Mae or Freddie Mac. Since these federal agencies can’t guarantee the loan, if a borrower defaults, the lender isn’t protected from losses. 

A jumbo loan can come with a fixed interest rate or adjustable interest rate, and they have varying terms. 

Conforming vs. Nonconforming Loan

A conforming loan is one that’s going to meet guidelines set by government-backed agencies—Fannie Mae and Freddie Mac. There are a lot of criteria you have to meet to qualify for a conforming loan, and this includes the amount you want to borrow. 

A conforming loan, in addition to meeting requirements for the amount you can borrow, also has to meet specifications about the size of your down payment relative to your loan, the borrower’s debt-to-income (DTI) ratio, the type of property and your credit score and history as a borrower. 

Most conforming loans require that your credit score is at least 630-650, although to get the most competitive interest rates, you’ll usually need a score of at least 740. You need a minimum down payment of 3% and a DTI ratio that’s no more than 41%. 

A non-conforming loan doesn’t meet the requirements of a conforming loan. Jumbo loans are non-conforming since they exceed a max loan limit, but there are other reasons a loan might be non-conforming such as the property type it’s used for. 

Non-conforming loans can have a higher interest rate, but not always. 

With a credit score that’s on the lower end, you could try a non-conforming loan. 

How Does a Jumbo Loan Work?

If you’re trying to buy an expensive home, you’re probably going to have to go through a significantly more stringent underwriting process because there’s more credit risk for the lender with a jumbo loan. This risk is not only due to the fact that the loans aren’t guaranteed by Fannie Mae or Freddie Mac but also because there’s more money involved. 

The minimum requirements for a jumbo loan have gotten stricter since 2008, which is true of traditional mortgages. 

You’ll need at least a 700 as far as your credit score, and you need to demonstrate a very low debt-to-income (DTI) ratio. The DTI should be less than 43% and preferably closer to 36%. 

Even though a jumbo loan is non-conforming, it still has to fall into the guidelines of a qualified mortgage based on guidelines set by the Consumer Financial Protection Bureau. A qualified mortgage, by these standards, is one with a lending system that follows a set of rules, like the 43% DTI. 

You’ll have to show that you have cash reserves so you can cover your payments, and the income levels and amount of reserves depend on the size of the loan. 

You’ll have to show 30 days of pay stubs and your W2 tax forms for two years. 

If you’re self-employed, you’ll have to show even more. You’ll need to show your tax returns for at least the past two years and at least 60 days of your bank statements. 

You’ll have to demonstrate that you have provable liquid assets and cash reserves that are going to be equal to six months of your mortgage payments. You’ll have to show the lender documents on any other loans you hold and proof that you own non-liquid assets. 

In the past, you were required to put a 30% down payment on a property using a jumbo loan, compared to the standard for conventional mortgages, which is 20%. Now, you may be able to make less of a down payment. 

Who Should Consider a Jumbo Loan?

How much you can borrow for any loan is going to depend on your personal financial situation, but you should only consider a jumbo loan in most cases if you’re a high-income earner. That means you’re someone who makes between $250,000 and $500,000 a year. 

Jumbo loans are usually reserved for borrowers who earn a lot of money but without a lot of assets accumulated yet, like millions of dollars in cash in the bank. 

You might not have the cash available to buy such an expensive home, but you might have a good credit score in addition to a high income. 

Appraisals

Your lender might require, in addition to the standard appraisal for any mortgage, a second appraisal. This is a second opinion appraisal required to make sure of the property’s market value. 

Finally, you can expect if you’re going to get a jumbo loan that, you’re going to pay higher closing costs. You’ll need to pay more in closing costs because of the in-depth verification process that’s required for a jumbo loan compared to the process for a conventional mortgage. A lender will usually charge a higher percentage of the overall purchase price for the costs of loan origination. 

If you have even a bit of doubt about your ability to meet the qualification requirements for a jumbo loan, it could be the wrong option for you.