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In this series we have broken down the most popular mortgage loans, shown you how ARM loans work, and explained Home Equity Lines of Credit (HELOCs). For the final entry of our “Mortgage Loans EXPLAINED” series, we will dive into Jumbo Loans.

 

What is a Jumbo Loan?

 

A jumbo loan or jumbo mortgage is a mortgage loan that exceeds the limit set by the Federal Housing Finance Agency (FHFA). Jumbo loans cannot be secured by the government-sponsored Fannie Mae or Freddie Mac, which makes them riskier for lenders.

 

What Are Conforming Loan Limits?

 

Conforming loan limits are set by Fannie and Freddie, and they dictate how high your mortgage can be. Mortgages that fall under the limit have insurance that protects the lender. Jumbo loans are sometimes called “non-conforming loans” because they go above this limit.

Conforming loan limits vary by state and market. In 2021, you can only borrow up to $548,250 for a single-family unit in most parts of the U.S. However, conforming loan limits go as high as $822,375 in high-cost areas.

If the amount of money you borrow goes above these limits, your loan automatically becomes a jumbo loan.

 

Special Considerations

 

Before you attempt to take out a jumbo loan, consider these factors:

 

Cash Reserves

Before a lender will approve you for a jumbo loan, it is often necessary to have enough cash reserves on hand to cover 12-18 months of mortgage payments. In some cases, you can use up to 70% of your retirement account funds to cover a portion of the cash reserve requirement. Gift funds or business funds can also be used in specific cases, though this is less common.

 

Closing Costs and Interest Rates

Due to the size of these loans and the extra steps required to qualify for them, you should be prepared for a higher closing cost. However, the same does not always apply for the interest rate. While jumbo mortgage rates might be a little higher in some cases, generally you can expect them to be competitive with market rates (and maybe even slightly lower).

 

Income and Documentation

It is normal when applying for a conforming loan to be asked for extensive documentation, including tax returns, W-2s, and 1099s. With jumbo loans, these requirements are often even more stringent. You must be able to prove steady, consistent income, often going back 2 or more years.

 

Credit Score and DTI

To qualify for a jumbo loan, most lenders will require you to have a minimum credit score of 700-720. For your debt-to-income ratio (DTI), 45% is a standard cap. However, some lenders may be willing to budge on this if you have substantial cash reserves.

 

Summary

 

Jumbo loans are large home loans that are higher than the conforming limits set by Fannie Mae and Freddie Mac. These mortgages are riskier than conventional or government-backed mortgages because they don’t have insurance.

This means that if you default on a jumbo loan, the bank has to foot the bill. You can use a standard jumbo loan to buy many types of properties, though requirements may vary by lender. For more information and to see if you qualify for a jumbo loan, contact us below!