Jumbo Loans exceed the maximum loan amounts established by Fannie Mae and Freddie Mac conventional loan limits. Rates on jumbo loans are typically higher than conforming loans. Jumbo Loans are typically used to buy more expensive homes and high-end custom construction homes.
What Is A Jumbo Loan?
A jumbo loan (or jumbo mortgage) is a type of financing where the loan amount is higher than the conforming loan limits set by the Federal Housing Finance Agency (FHFA).
The 2021 loan limit on conforming loans is $548,
250 in most areas and $822,375 in high-cost areas. For borrowers interested in purchasing more expensive properties, jumbo loans are a valuable alternative.
An added benefit of this mortgage option is that there’s no mortgage insurance requirement. However, because this loan may come at a higher risk to the lender, it typically has slightly stricter qualification requirements than typical conforming loans that possess lower limits.
Jumbo Loan Limits & Requirements
In general, an underwriter evaluates a jumbo loan with many of the same lending criteria as they would a conventional loan – even if those requirements are a bit more stringent. You should expect your lender to request both your credit score and debt-to-income ratio (DTI), which compares your minimum monthly installment and revolving debt payments to monthly income.
However, it’s not uncommon for lenders to request jumbo mortgage applicants to meet special demands before approving them for the loan. Because lenders take on higher risk with jumbo loans, these extra measures help ensure they are lending money to borrowers who have the capacity to make payments.
For instance, jumbo loan lenders often require proof of consistent income and cash reserves or liquid assets to confirm you have the funds to pay back your loan. On top of that, you might pay higher closing costs and a larger down payment.
More specifically, what you need to qualify for this loan will depend on what type of jumbo loan you’re getting and the amount you need to borrow.
Jumbo Mortgage On A Home Purchase
If you’re buying a one-unit primary property with a loan amount of up to $2 million, you’ll need to have a minimum median FICO Score of 680 and a minimum down payment of 10.01%.
The maximum debt-to-income ratio must be no higher than 45%.
If the primary residence has more than one unit or the loan amount is higher than $2 million, you may have slightly different credit score requirements, and you’ll need to make a higher down payment – up to 25%, depending on the loan amount and type of occupancy.
Jumbo Loan Rates
Because there’s greater risk involved in lending large amounts of money, jumbo loans are often erroneously thought to carry higher interest rates than conforming loans. However, jumbo loan rates can vary dramatically, depending on your lender, finances, and down payment. When mortgages are viewed as involving less risk, lenders may choose to offer rates that are in line with or even lower than conforming loan rates.
The extreme variation in jumbo loan rates makes it even more important to shop around before choosing a specific lender, as each will offer different loan terms.