Looking to finance a high-value home beyond conventional loan limits? Delve into the world of jumbo loans with this guide. Learn about property options, credit score requirements, and the application process. Discover the differences between jumbo and conforming loans and find tips for securing competitive jumbo mortgage rates.

 

What is a Jumbo Loan?

A jumbo loan is a mortgage designed for properties that surpass the limits of conventional conforming loans. These loans are used when a home's price exceeds the 2023 conforming loan limit of $726,200, as defined by the Federal Housing Finance Agency (FHFA). Unlike conforming loans, jumbo loans aren't backed by Fannie Mae and Freddie Mac, making them riskier for lenders. Jumbo loans offer both fixed and adjustable interest rates with various terms.

 

How Does a Jumbo Home Loan Work?

Like conventional mortgages, jumbo loans come in various terms and 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 a particular property type, down payment, credit score, and debt-to-income ratio requirements to get one.

 

Property Types

Jumbo loans offer flexibility when it comes to property types. The government doesn't limit your options; as long as you meet your lender's criteria, you can utilize most jumbo mortgages for primary residences, vacation homes, and investment properties.

 

Down Payment

Jumbo loans often come with significantly larger down payment demands compared to conforming loans. For single-family units, it's typical for lenders to ask for a 20% down payment. Second homes and multifamily units might also necessitate a higher down payment. Finally, the down payment depends on your loan amount and credit score.

 

Credit Score

Your credit score – a numerical rating of your reliability as a borrower – is a significant factor when seeking a jumbo mortgage. Your credit score is a numeric representation of your trustworthiness as a borrower. Your score can range from 300 – 850 based on several factors.

 

The credit score you’ll need to qualify for a jumbo mortgage depends on the lender and loan terms. For a Jumbo Smart loan on primary residences, vacation homes, and investment properties with a 30-year fixed term, a median FICOⓇ Score of 680 is the minimum requirement. However, this can vary up to 760 depending on the property type and what you want to do in your mortgage transaction.

A credit score of 740 or higher is required for a 15-year fixed loan or a Jumbo Smart ARM.

 

Debt-To-Income Ratio (DTI)

The debt-to-income (DTI) ratio measures your income in relation to your debts. To find your DTI ratio, divide your required monthly debt payments by the amount you earn before taxes.

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

A low DTI ratio is critical when getting a jumbo loan because it tells lenders you will have enough cash flow to cover your mortgage payments. Having a larger down payment or a higher credit score might make you eligible for a jumbo loan with an increased DTI ratio.

 

How To Apply For A Jumbo Loan

The application process for a jumbo loan is similar to other mortgage types:

 

1. Choose A Lender

Like any mortgage, you’ll first need to choose a lender. You’ll want to be incredibly diligent about shopping around to see who will give you the most favorable terms. With such a large loan, even a slight difference in interest rate can save you thousands of dollars over the life of your loan.

 

1. Get Your Initial Mortgage Approval

Once you’ve chosen a lender, you can start getting your initial mortgage approval. You'll submit financial documents to your lender, and they will determine your eligibility and the applicable interest rate.

 

1. Find A House And Submit An Offer

With your initial mortgage approval, you can find the perfect property and submit your offer. A real estate agent can assist you in maneuvering through this process, coordinating property viewings, managing documentation, and bargaining with the seller.

 

1. Undergo Appraisal And Go Through Underwriting

Once your offer is accepted, and you’re under contract, your lender will get to work underwriting your loan. As previously mentioned, jumbo loans often require manual underwriting, meaning that a person will complete the process themselves rather than running it through a computer.

Your lender will also order an appraisal to ensure your property isn’t worth less than the money they’re lending you to purchase it.

 

1. Close On Your Jumbo Loan

Once the appraisal and underwriting are complete, your lender will tell you you can close your jumbo loan. You’ll need to know how much cash to bring to closing to cover your down payment and closing costs, which will be detailed in your Closing Disclosure.

 

Jumbo Loans vs. Conforming Loans

The critical difference between a jumbo mortgage and a conforming loan is the size of the loan. For a thorough look at the pros and cons of each, read about the differences between conforming and non-conforming loans.

Other distinctions setting jumbo loans apart from conforming loans include:

 

Heftier down payment

While low down payments are pretty standard on conforming loans, jumbo loans are more likely to require a down payment of at least 20%, though some lenders may go as low as 10%.

 

Potentially higher interest rates

Depending on the lender and your financial situation, jumbo mortgage rates may be slightly higher than those on conforming loans. Nonetheless, several lenders can provide jumbo loan rates that rival conforming loan rates. In some cases, they might even offer slightly lower rates, depending on market conditions. It's essential to explore various options, so be sure to compare rates.

 

Higher closing costs and fees

Because jumbo loans are more extensive and there are some extra qualifying steps, expect higher costs at the closing table.

 

Loan Limits

The loan limit for conforming loans varies by county because some real estate markets are much pricier than others. For 2023, the conforming loan limit for one-unit homes in most counties nationwide is $726,200. Yet, in "high-cost regions," particularly in the Northeast and along the West Coast, conforming loan limits extend to $1,089,300 — and may even exceed that in select areas.

 

Tips for the Best Jumbo Mortgage Rates

Prior to seeking a jumbo loan, ensure your financial situation is in good shape. This means bolstering your savings, addressing any credit report errors, and paying down significant debts. Shop around and compare mortgage rates from at least three jumbo lenders to find competitive rates. Even a small rate difference can significantly impact the cost of your loan over time. If jumbo loan rates are unattractive, consider increasing your down payment or explore alternative financing options.