what is considered a jumbo loan

A jumbo loan is any mortgage loan that exceeds loan-servicing limits set by Fannie Mae and Freddie Mac. The baseline loan limit for 2023 is $726,200 in most states and $1,089,300 for single-unit properties in Alaska and Hawaii.1

If you’re interested in buying a home, you likely have questions about mortgage loans. Keep reading to learn how you can qualify for a jumbo loan. 

What Are Conforming and Non-Conforming Home Loans?

Before you learn what a jumbo loan is, you must first know the differences between conforming and non-conforming mortgage loans.

Conforming Loans

A conforming home loan is any mortgage loan that can be sold to federally backed home mortgage companies created by the United States Congress. 

Conforming loans must adhere to strict guidelines, which is why they are the only types of loans that Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) buy. Conforming loan rates are typically lower than non-conforming loan rates and offer additional federal protections for borrowers.

To be eligible for a conforming loan, borrowers need to meet these qualification requirements:

  • Have a minimum credit score of 620.
  • Have a debt-to-income-ratio lower than 43%.
  • Have at least a 3% down payment.

A conventional conforming loan may not be ideal for you if you want to buy an expensive house in an area with a high cost of living. Due to conforming loan limits, you will have difficulty purchasing a home in a costly city like New York City or San Francisco. 

Non-Conforming Loans

A non-conforming loan is a home loan that can’t be sold to federally backed mortgage institutions because they don’t adhere to requirements like conforming mortgages. Every government-backed loan is a non-conforming loan, such as an FHA loan. 

Non-conforming home loans are helpful for borrowers that want to purchase an expensive home since eligible borrowers can get much more than the conforming loan limit. If you want to sign up for a government-backed loan program, then a non-conforming loan is the ideal option. 

Since lenders cannot sell non-conforming loans, they tend to have stricter qualification requirements and higher interest rates. Requirements vary depending on the specific type of loan you want and the lender. However, borrowers typically need a credit score higher than 580 to qualify for non-conforming mortgages. 

What Is the Federal Housing Finance Agency?

The Housing and Economic Recovery Act created the Federal Housing Finance Agency (FHFA) in 2008 after the financial crisis to stabilize the mortgage market. The FHFA supervises and regulates federally backed mortgage institutions and the Federal Home Loan Bank System. 

The FHFA also oversees the conservatorships of federally backed mortgage institutions. In 2019, the FHFA created a Strategic Plan for the Conservatorships of federally backed mortgage companies. The Strategic Plan aims to foster competitive, liquid, efficient, and resilient (CLEAR) national housing finance markets. 

What Is a Jumbo Loan? 

A jumbo mortgage loan, or jumbo loan, is a non-conforming mortgage loan that offers more than the conforming loan limit. Jumbo mortgages are ideal if you want to buy an expensive home or live in a high-cost area. Jumbo loan limits vary per lender, but borrowers can secure more than they can with conventional loans. 

Keep in mind that it is possible to get more than $726,200 with a conventional loan. In certain areas where the median price of a home is higher, the purchase price of a home can go above $726,200. Check the maximum county loan limit to see how much you can get. But ensure you talk to your lender first. If the home loan is more than $726,200, the lender may classify it as a jumbo mortgage. 

Jumbo Mortgage Rates

Jumbo mortgage rates used to be at least 0.25% higher than conforming home loans because jumbo loans were financially riskier for lenders. However, federal regulations changed after the financial crisis of 2008. The mortgage rates between conforming and jumbo loans are now very similar. 

Jumbo Loans in the Housing Market

You might be wondering, “Are jumbo loans common?” Jumbo mortgages are less frequent than standard loans, especially in areas where home prices are closer to the national median. However, in high-cost areas like certain metropolitan cities or luxury housing markets, they’re a go-to option!

Why Location Matters for Jumbo Loans

The location of your dream home can influence your loan options. In high-cost areas, you might find that what’s considered a “jumbo loan” elsewhere might be the norm. Always check local housing prices and loan limits — they can vary more than you’d think!

Finding the Right Mortgage Lender

In order to qualify for a jumbo loan and get the best terms for your situation, it’s important to find a specialized lender. While many national banks offer them, consider reaching out to mortgage brokers or using online platforms to compare offers. They can provide a wealth of information and help you navigate the jumbo journey.

Qualification Requirements for Jumbo Loans

A higher credit score can help you qualify for a jumbo loan and obtain better financial opportunities. A tier 1 credit score can help a borrower secure more money and lower interest rates. You may worry about your eligibility for loans with a 580 credit score. Unfortunately, most jumbo loan lenders require a minimum score of 700 since the loan amount is above the federal loan limit. As of April 2022, the national average FICO Score is 716.2  

Since jumbo loans offer more significant loan amounts, they are financially risky for lenders. Most lenders will expect a large down payment for mortgage loan approval. A down payment is an upfront payment for a real estate property. Ideally, you should be able to provide at least 20% of the home’s purchase price upfront. But if your credit score is excellent, you may qualify for a jumbo loan with a smaller down payment. 

Who Might Face Challenges Qualifying for Jumbo Loans?

Qualifying for a jumbo can be tough. Those with lower credit scores, high debt-to-income ratios, or inconsistent income might find the process challenging. But don’t be disheartened — financial advisors can offer strategies to improve your borrowing potential!

What Are the Average Jumbo Loan Terms?

If you ask, “What is a jumbo loan?” then you may also wonder about the average loan terms. While loan terms vary according to different factors, you can generally expect the following: 

TermAverage or Typical Range
Interest Rate3.0% – 4.5%*
Loan Term15 to 30 years
Down Payment10% – 20% or more of purchase price
Credit Requirement700 or higher
Debt-to-Income Ratio43% or lower
Cash Reserves6 – 12 months of mortgage payments

What Is a Jumbo Loan With Adjustable Interest Rates?

An adjustable-rate mortgage, or ARM, has interest rates that fluctuate after a predetermined amount of time. For example, 5/1 ARMs require borrowers to pay fixed interest rates for the first five years and then adjust on a yearly basis. 

Jumbo ARMs are ideal for borrowers that want to buy an expensive real estate property. A Jumbo ARM is meant for buyers that need a Jumbo loan that exceeds the conforming loan limit of $726,200 for a one-unit home set by federally backed home mortgage companies.

Qualification Requirements for a Jumbo ARM

Due to the high loan amounts of these installment loans, borrowers will need to meet strict qualification requirements to get a Jumbo ARM. While the requirements can vary depending on the lender, you can generally expect Jumbo lenders to ask for the following expectations:

  • Your monthly payments should be less than 38% of your pre-tax income.
  • You generally need a 740 credit rating or higher.
  • You must be able to provide supporting documentation (proof of income, proof of identity, etc.)

Is a Jumbo Loan a Good Idea?

To determine whether a jumbo mortgage is a good idea, it’s critical to calculate how much house you can afford to buy. You can determine how much house you can afford to buy by using the 28/36 rule. 

The 28/36 Rule for Home Buying

This budget method states that your housing expenses should not exceed 28% of your gross monthly income. Calculating your total housing expenses includes mortgage payments, taxes, and insurance payments. In addition, your total debt should be lower than 36% of your gross monthly income. Your total debt should include payday loans, credit card debt, title loans, etc. 

Alternatives to Jumbo Loans

If a jumbo loan doesn’t feel right for you, there are alternatives. Some buyers opt for piggyback loans — simultaneously taking out a conventional loan and a smaller loan to cover additional costs. Others might look into portfolio loans offered by banks willing to keep the loans on their books.

The Pros and Cons of Jumbo Loans 

Take a look at the main advantages and disadvantages of jumbo loans below. 

The Pros

  • Higher Borrowing Limits: Jumbo loans allow you to finance luxury properties and expensive homes that exceed conventional loan limits.
  • Competitive Rates: Rates for jumbo loans can be competitive with certain lenders.
  • Flexibility: Variety of loan terms available.
  • No PMI Potential: Possible avoidance of private mortgage insurance.

The Cons 

  • Stricter Requirements: Qualifying can be more challenging due to higher credit score and financial requirements.
  • Higher Costs: Jumbo loans often require higher interest rates and a higher down payment.
  • Market Risks: Greater exposure to market fluctuations.
  • Fewer Lenders: Limited options for lenders specializing in jumbo loans.

Frequently Asked Questions About Jumbo Loans

What are the main advantages of opting for a jumbo loan?

While the article didn’t dive into the benefits, jumbo loans are fantastic because they enable you to borrow beyond the standard loan limits for luxury properties. This means you can secure your dream home with a single mortgage, rather than juggling multiple loans!

Are there any downsides to choosing a jumbo mortgage?

Great question! Jumbo mortgages often require a higher down payment and a better FICO score compared to conventional loans. They can also come with higher interest rates, so it’s essential to be prepared for these possibilities.

Can I use a jumbo loan for any property? What about a vacation home or investment property?

Jumbo loans are typically used for primary residences, but they can also be an option for second homes or investment properties. However, the loan limits and qualifications might be different, so it’s best to check with your lender for specifics.

What alternatives do I have if I don’t want a jumbo loan but wish to buy a high-value property?

If a jumbo loan doesn’t seem right for you, consider taking out two or more mortgages to cover the cost or looking into other financing options like portfolio loans. Always weigh the pros and cons based on your financial situation.

How do lenders determine the maximum amount I can borrow with a jumbo loan?

Lenders consider several factors, including your credit score, the property’s value, and more. They’ll also look at your debt-to-income ratio to ensure you can manage payments comfortably.

Where can I find more information about current jumbo loan limits?

Jumbo loan limits can vary by location and lender. For the most accurate and up-to-date information, it’s best to contact local lenders or visit the Federal Housing Finance Agency’s website.

How might a jumbo loan impact my credit score?

Applying for any loan, including a jumbo loan, involves a hard credit inquiry, which can temporarily lower your credit score. However, making consistent, on-time payments can positively influence your score over time.

What kind of down payment do I need for a jumbo loan?

Jumbo loans typically require a larger down payment than conventional loans — often 20% or more of the home’s purchase price. The exact amount can vary based on your credit score, income, and the lender’s requirements.

Are there specific cash reserves required when applying for a jumbo mortgage?

Yes, lenders often require you to have a certain number of months’ worth of home loan payments in the bank — known as cash reserves. This requirement ensures you can afford the loan and serves as a safety net for both you and the lender.

Who should I talk to for advice about whether a jumbo loan is right for me?

If you need a jumbo loan, it’s wise to consult with a financial advisor, a mortgage broker, or a lender specializing in jumbo loans. They can provide valuable insights into your financial picture and help determine if a jumbo loan aligns with your home buying needs and goals.

Takeaway Notes on Jumbo Loans From CreditNinja

A jumbo loan is a non-conforming loan option for prospective homebuyers that want to buy a home that costs more than $647,200. Eligibility for a jumbo loan depends on your income, down payment, and interest rate. Jumbo loan rates are competitive but may require a larger down payment. If you can comfortably afford an expensive home, go ahead and apply for a jumbo mortgage loan!

CreditNinja offers online loans and expert financial tips on almost any financial topic. Check out our online blog for information on reverse mortgage loans, qualifying for home repair loans with bad credit, and more!

References:

  1. Conforming Loan Limits In 2023 │ Rocket Mortgage
  2. U.S. FICO® Scores │ FICO
  3. Is a Jumbo ARM right for you? │ United Home Loans
  4. What Are Jumbo Loans? │ Zillow
  5. Conforming Vs. Non-Conforming Loan: Which Is Best For You? │ Forbes 
  6. FHFA AT-A-GLANCE  │ FHFA 
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