For homebuyers who are interested in larger or more expensive homes that exceed certain conforming thresholds, it’s common to consider a Jumbo loan program. Learn what exactly a Jumbo loan is, what’s needed to qualify for one, and what to consider when looking into a Jumbo loan.
At Supreme Lending, we're happy to work with you to help with any and all home loan needs, including Jumbo loans.
What Is a Jumbo Loan?
To understand Jumbo loans, you first need to understand conforming loans, which have amounts set by the Federal Housing Finance Agency (FHFA). The 2022 conforming loan amount in most of the country is $647,200, though this can vary depending on the county in which you're looking to purchase a property. If the loan amount is larger than this, it would be considered a Jumbo loan.
The FHFA puts a limit on how large conforming loans can be as they are backed by government-sponsored entities like Freddie Mac or Fannie Mae. Jumbo loans present a higher risk to lenders and often have different requirements than conforming loans.
Differences Between Jumbo Loans and Conforming Loans
Let's go over the direct differences in qualifications and other areas between Jumbo loans and conforming loans:
- Down payment requirements: Jumbo loans tend to have stricter down payment requirements, often 20% or more of the loan amount. Conforming loans may be as low as 3% for first-time homebuyers.
- Private mortgage insurance (PMI): Jumbo loans almost always require PMI, whereas conforming loans only require it if the down payment is less than 20%.
- Interest rates: Jumbo loans often come with higher interest rates than conforming loans due to the potential of higher risk involved for lenders.
- Loan limits: The main difference between these two types of loans is the loan limit. If the amount you're looking to borrow exceeds the FHFA's limit for your county, it's a Jumbo loan.
- Closing costs and fees: Finally, closing costs and fees tend to be higher for Jumbo loans than conforming loans because they can be more complex and involve more work for the lender.
Qualification Thresholds for Jumbo Loans
While these can vary somewhat depending on your area and a few other factors, here are some general guidelines for qualifying for a Jumbo loan:
- Credit score: Credit and related requirements are typically higher for Jumbo loans than Conventional loans. There usually is a hard credit score minimum of 700, and many lenders may even require as high as 720 or 740.
- Debt-to-income (DTI) ratio: The maximum DTI for a Jumbo loan is typically around 45%,though this can vary depending on the specific lender. This means that no more than 45% of your income should be going toward debts each month.
- Documentation: Jumbo loans typically require extensive documentation, often including tax returns, bank statements, and asset verification. This is to ensure that you're able to repay the loan and aren't taking on more debt than you can handle.
- Cash reserves: Another important factor that lenders will look at is your cash reserves. This is the amount of money you have left over after closing on a property that can be used to make mortgage payments if necessary. Lenders typically like to see at least six months' worth of mortgage payments in cash reserves, though this can vary.
- Appraisals: In certain cases, not just one but two appraisals may be required for a Jumbo loan. This is to ensure that the property is worth at least as much as the loan amount, and is yet another way that lenders protect themselves from taking on too much risk.
As you can see, there's a lot to consider if you're thinking of applying for a Jumbo mortgage program. Make sure you understand all the requirements and are comfortable with any potential risks.
Possible Reasons to Avoid a Jumbo Loan
Jumbo loans may not be for everyone. There are a few potential reasons why you may want to avoid them:
- You don't actually need a Jumbo loan: If you're interested in a larger home but don't actually need to borrow more than the conforming loan limit, it doesn't make sense to take out a Jumbo loan because you'll just end up paying more in interest and fees than necessary.
- You don't qualify: As noted above, the qualification requirements for Jumbo loans are typically stricter. If you don't think you can meet them, it's probably not worth your time to apply.
- The interest rates are too high: Jumbo loan interest rates tend to be higher than conforming loan rates, so if you're not comfortable with that you may want to look at other options.
For more information on Jumbo loans, or to learn more about any of our mortgage products and services, contact your local Supreme Lending team today.