Everything You Need To Know About A Jumbo Loan

Financing your home or rental investment property can be a daunting task. To make the process easier, it’s helpful to understand all of your loan options. One of those is a jumbo loan.

Jumbo loans may be the key you need to unlock your new luxury home or investment, but it’s important to know what you’re getting into before signing on the dotted line.

In this guide, we’ll cover everything you need to know about a jumbo loan, from what it is, to how to qualify and the risks involved.

What Is A Jumbo Loan?

A jumbo mortgage loan is a non-conforming mortgage product with a loan amount that is higher than the limit set by the Federal Housing Finance Agency (FHFA).

The maximum value can differ depending on the county or state or mortgage lender. For example, in California and Alaska, jumbo loan limits are higher than they are in other parts of the country. Also, the qualifying criteria for jumbo loans may differ as well.

Compared to conforming loans, jumbo loans tend to come with higher interest rates and down payment, and stricter underwriting requirements. While the supply of jumbo loans is increasing in this housing market, they remain difficult to acquire, so you will have to shop around the mortgage houses to find one that meets your needs.

Qualifying For A Jumbo Loan

Getting approved for jumbo mortgage loans can be a challenging process. Here are some of the qualification standards to keep in mind:

Cash Reserves

Lenders typically require borrowers to have a certain amount of cash reserves. This is the amount of money that’s on hand and immediately available to use if necessary. You will need to demonstrate that you have enough cash reserves to cover at least two months of payments in case of an emergency.

Documentation

Lenders require a lot of documentation when you are applying for a jumbo loan, such as detailed records of your income, assets, and debts. You may also be asked to provide past tax returns, W-2s, and 1099s as well as bank statements and all investment accounts.

When you are looking for a jumbo loan, make sure that you have all of the necessary paperwork before making an offer. It’s always helpful to have a professional home loan consultant assist you with the process.

Appraisals

Lenders will need an appraisal of the property that you are buying in order to approve your jumbo loan. Appraisals are performed by a professional who will assess the home’s value and compare it to similar properties in the area.

The appraisal process can take some time, so be sure to budget for this when determining your timeline.

Credit Score

Your credit score is one of the most important factors that lenders consider when approving a loan. Generally, you need a credit score of at least 700 or 720 for jumbo loan approval.

Lower scores may still be accepted, but the interest rates may be higher, and you will need to provide additional documentation.

Debt-To-Income Ratio

To calculate this, you will need a low debt-to-income (DTI) ratio, which is the percentage of your monthly income that goes toward paying all of your debts. If you don’t meet the requirements of a loan, you must have a good credit score to qualify.

For instance, if you make $2000 in bill payments monthly and your monthly salary before tax is $4000, the DTI ratio will be 50%. This is shown by $4000 divided by $2000 = 50%.

Remember the lower the DTI ratio, the more likely you are to get approved for a loan. Lenders typically expect a DTI ratio of no more than 43% to 45%, so make sure you have a plan for paying down payments and monthly payments on your debts before applying for a jumbo loan.

Loan Limits For Jumbo Loans

Fannie Mae and Freddie Mac set the loan limits for conventional loans. The loan limit for an entire area is calculated by median home values in that area, with Fannie Mae and Freddie Mac setting the limit for a single-family home set at $417,000.

Each county and state sets its own loan limits for jumbo loans. Generally, the loan amount is higher than the conforming loan limit set by the government. You can also consult with the Federal Housing Finance Agency (FHFA) for the conforming loan limits of 2023, as anything over this may be considered a jumbo loan.

For 2023, in most of the United States, the 2023 conforming loan limit value for one-unit properties will be $726,200, an increase of $79,000 from $647,200 in 2022. Depending on the area, loan limits may be higher or lower.

You Might Want a Jumbo Mortgage If:

You’re Financing a Luxury Home

Jumbo mortgages are tailored for luxury homes, which can exceed the conforming loan limits. Also, high-cost areas, especially in the Northeast and on the West Coast, tend to have higher loan limits.

You Have a Strong Credit

If you have a strong credit score, you can take advantage of competitive interest rates on jumbo loans. This is because lenders feel more confident working with borrowers who have a proven track record of making mortgage payments on time.

You Have a High Income

Since lenders use the borrower’s income to qualify them for the loan, a higher income can make it easier to get approved for a jumbo mortgage. You may also be able to negotiate better terms on the loan, such as lower interest rates or fewer fees.

You Might Want a Conforming Mortgage If:

You’re Financing a Mortgage Under the Loan Limit.

If you’re looking to finance a home that is below the loan limit, then you may be better off applying for a conforming mortgage. Conforming loans often have lower interest rates and more flexible terms than jumbo loans, making them an attractive option for many borrowers.

You Have an Average Income

If you have an average income, then you may be better off with a conforming loan rather than a jumbo loan. This is because it’s easier to get approved for a conforming loan if your income falls within the median range.

What Else Do Know About Jumbo Loans?

Jumbo loans typically come with a number of additional fees and costs, such as higher closing costs and origination fees, that can make them more expensive than conforming loans. Additionally, lenders often require additional documentation for a jumbo loan, and the application process may take longer to be approved. Manual underwriting may also be required, which can mean that the underwriter must review additional documentation in order to determine if the loan is a good fit.

Jumbo mortgages also may come with a heftier down payment and higher interest rates compared to conforming loans. This is because the lender is taking on a greater risk, so they may require more money up-front and higher interest rates to offset that risk.

Do You Have To Put 20% Down on a Jumbo?

No, you do not have to put a 20% down payment on a jumbo loan. As with conforming loans, the required down payment will depend on the lender and your creditworthiness, but many lenders will accept a down payment as low as 5% as a down payment. However, it’s important to remember that a larger down payment may help you secure better terms on the loan, such as lower interest rates or fewer fees.

What Do Underwriters Look for on Jumbo Loans?

When it comes to approving a jumbo loan, underwriters will typically look at a number of factors. These include the borrower’s credit score, debt-to-income ratio, employment history, and assets. They will also look at the home’s appraisal value and other factors to determine if the loan is a good fit.

In general, jumbo loans are riskier for lenders than conforming loans, so they will be looking for borrowers who are reliable and have a high credit score. Lenders may also require additional documentation, or even manual underwriting, in order to make sure the loan is a safe investment.

Your North Carolina Real Estate Expert

Overall, jumbo loans offer an attractive financing option for those looking to purchase a home that is above the loan limit. They offer competitive interest rates and flexible terms, but they also come with additional costs and requirements that may make them more expensive. It’s important to do your research and understand the pros and cons of jumbo loans so that you can make an informed decision.

If you need further guidance or advice on jumbo loans, Nicole Leininger, your North Carolina Real Estate Expert, has the knowledge and experience to help you make an informed decision.