A jumbo home loan is a mortgage that is above the limit of loans that are bought by Fannie Mae and Freddie Mac, which are two government sponsored enterprises GSE. Conforming loans are loans that have been made according to the guidelines that make them eligible for purchase by Fannie Mae and Freddie Mac. The FHFA sets and changes these limits every year in relation to the changes in the average price of homes in the United States.
For 2023, the baseline conforming loan limit applicable across nearly all of the United States is $759,750. This means that any loan that does not exceed $759,750 is considered to be conforming loan. Loans beyond this are termed as jumbo loans or non-conforming loans. There are higher conforming limits for counties that are considered high-cost like San Francisco and New York but anything above the higher limits is considered a jumbo loan.
Key Characteristics of Jumbo Loans
Here are some key characteristics of jumbo home loans:Here are some key characteristics of jumbo home loans:
Loan Amounts – Jumbo loans offer loan amounts that go beyond the conforming loan limits depending on the location, which begins at $759,750. A majority of the jumbos, however, are within the $1 million to $2 million bracket, although some can go higher.
Interest Rates - The interest rates on jumbo loans are typically a little higher at about an eighth to a quarter of one percent more than that of conforming loans. This is because unlike non-conforming loans, conforming loans are eligible for purchase by Fannie Mae and Freddie Mac, therefore meaning that they are less risky for the lender. However, rates for quality jumbo paper are still quite low.
Down Payments – Jumbo loans require higher down payments compared to those required in conforming loans. A down payment of 10% to 20 % may be expected on the jumbo loan while the conforming loan only allows for 3% to 5% down payment. This in turns assists in mitigating the extra lending risk that came with jumbos. Larger down payments also imply lower loan-to-value ratios on the jumbos.
Debt-to-Income Ratios – Jumbo borrowers must have lower DTI ratios, ideally between 36-43% while the standard for conforming loans is 45% or 50% at most. This means having less existing monthly debt than your monthly income.
Credit Scores – Similar to conforming loans, jumbo loans come with favorable credit, usually minimum credit score of 700. However, most jumbo lenders require credit score of 740 and above for them to qualify for the best interest rates. Jumbos are typically extended only to individuals who have a clean credit record.
Reserves – After closing jumbo borrowers need to demonstrate adequate cash reserves with some lenders requiring as much as 12 months to 24 months of mortgage payment, taxes, insurance, and other costs. If you have large reserves, an additional benefit is the added confidence that you can manage payments for the long-term.
Paperwork – Jumbo loans are fully documented. Low or no documentation or stated income options that can be found in conforming loans up to certain thresholds are not available when it comes to jumbos. Provide tax returns, pay stubs, bank/investment statements.
Who Offers Jumbo Loans
You can find jumbo mortgage loans through these lenders:You can find jumbo mortgage loans through these lenders:
Mortgage Lenders – There are some big national players such as Chase, Wells Fargo, Bank of America and many others as well as regional and local mortgage companies offering jumbo loan products. A few of the things that can be compared include the interest rates and the terms.
Banks and Credit Unions – With the willingness of taking on more risk, many banks and credit unions have the ability to originate jumbo mortgages for the right consumer depending on the market. Also, it is helpful to be the existing customer of the bank.
Online Lenders – There are also some lenders that operate exclusively online such as Bettercom and Lenda that can facilitate jumbo loans and the process is relatively quick and easy. So make sure you can check their rating and reviews.
Mortgage Brokers - A good broker with experience in dealing with jumbo loans with different lenders around the country can help you find and compare your ideal jumbo loan. They streamline the process.
Private Banks and Boutique Lenders – Self-employed or high net worth borrowers should also consider private banks and small jumbo lenders who offer better services and more flexible or portfolio Loans.
The Jumbo Loan Process
Getting approved for a jumbo loan involves much of the same process as a conforming loan, but generally with heightened scrutiny and standards at each step:Getting approved for a jumbo loan involves much of the same process as a conforming loan, but generally with heightened scrutiny and standards at each step:
Pre-approval – Begin with consultation with a lender and getting preapproved first to find out the maximum loan amount and rates one is eligible for before starting the process of house hunting. This lets sellers know that you are serious.
House Hunt – This is where you get focused on the houses that are priced beyond the current conforming limits and therefore, need jumbo money. Work with an agent.
Application and Documents - You will have to complete a full application with all income, tax, asset, and identification documents necessary, including permission for checking credit and employment history.
Home Appraisal – Before closing the credit, the lender will initiate a home appraisal to prove that the value corresponds to the agreed home price and the requested loan amount.
Underwriting and Approval – The lender examines all the features of your financial history – income, debts, assets, credit history, etc If you meet the more stringent requirements for jumbo loans, it is possible to get a loan approval.
Closing Disclosures - Three days prior to the closing date, a pack of all the final details including the interest rates, total costs, monthly payment, etc. , will be provided to you.
Loan Closing – discuss documents with attorneys and sign them. When completed, you give the down payment and closing cost and receive the house keys!
Jumbo Loans: The Advantages and Disadvantages
Jumbo loans have both advantages and possible disadvantages depending on your scenario:Jumbo loans have both advantages and possible disadvantages depending on your scenario:
Pros:
Finance a High-End Home - Jumbos enable you to purchase more costly homes that other conventional loans cannot fund. Dream big!
Cash-Out Refinancing – For even more cash, above and beyond conforming loan limits, you can refinance to a jumbo for home improvements, college tuition, or other necessities.
Less Mortgage Insurance – Jumbos may avoid high mortgage insurance requirements on conforming loans that are made with less than 20% equity to property since jumbos include larger down payments.
Affordable Prices – Even for jumbo loans, those with good credit scores will be able to get such loans at a cost that is below 6% or only 0. 25% higher than the cost of a conforming loan.
Cons:
Higher Standards for Qualification – When it comes to credit, income, assets, and reserves, you will be subjected to much higher standards than the conforming ones.
Higher Initial Payments – Higher down payments of up to 20%+ and closing costs on larger loan sizes require more cash to come to the closing.
Prepayment Penalties – Some jumbos have prepayment penalties where extra charges are levied on early sale or refinancing for the first few years of the loan.
They Can Be More Volatile – Unlike the jumbo rates which can vary in the future and can either increase or decrease, but rates of conforming remain relatively steady.
Of course, jumbo home loans enable the purchaser to afford a larger home and such frills as exercise rooms and pools if the borrower meets all of the higher requirements. Consult with other lenders to know whether a jumbo is right for you.
