The jumbo mortgage has become a very important loan program in 2024 as home values have soared making the demand for high loan amounts greater than ever. If you want to buy a larger, more expensive home, the size of your mortgage may exceed limits set by the federal government. You may need another way of financing it.
A jumbo loan may be the answer to purchasing the home of your dreams. Learn all about jumbo mortgage loans below. If you have jumbo loan requirements and more, BD Nationwide can help you find the best jumbo mortgage lenders online today.
How Is a Jumbo Mortgage Loan Defined?
As you might guess by the name, a jumbo loan is used for a larger-than-normal loan amount.
This type of loan is any mortgage that is more than your area’s conforming loan limits that are set annually by the Federal Housing and Finance Agency, or FHFA.
Many home lenders underwrite jumbo loans for up to $3 million or $5 million.
You also may be able to find a lender that can provide a mortgage for larger amounts. There are mortgage brokers that specialize in jumbo loans.
You can typically use a jumbo loan for your primary residence, vacation home, or investment property.
How Do Jumbo Loans Work?
Jumbo loans don’t conform to federal standards regarding their size, but they are similar to regular Fannie Mae and Freddie Mac-conforming mortgages. Fannie Mae and Freddie Mac are the two government-sponsored organizations that purchase most home loans in the US. The payment schedules for jumbo loans and other aspects are mostly the same. You can qualify for a jumbo loan with a fixed rate or adjustable rate, for example.
However, jumbo mortgage rates are frequently different from smaller mortgages that follow FHFA guidelines. Usually, jumbo loan mortgage rates are higher than other mortgages. But in 2024, the gap is narrower than in the past. As of April 2024, the current jumbo loan rates was around 7%, which was only a few tenths of a point higher than conforming mortgages. One of the reasons the rate is higher is higher guaranteed fees that lenders charge to do jumbo loans.
The maximum jumbo loan size depends on your location and lender. The market for these loans is smaller than other mortgages, so you may need to check with more lenders to find the best option.
Conventional Loans vs Jumbo Loans
Most mortgages in the United States are conforming loans, which means they confirm to Fannie and Freddie standards. Jumbo loans do not follow these standards and are a type of nonconforming loan.
A home buyer with a jumbo loan has more buying power than with a conforming mortgage loan. However, the payment will be higher because the loan is larger. To get a jumbo loan, you usually need a higher credit score, more income, as well as a larger down payment and assets than for regular mortgages. Some lenders require you to have a 740 credit score for a jumbo loan, while 620 is often the minimum for a conforming mortgage loan.
What Is the Jumbo Loan Limit?
You need to look at jumbo loans if you want to buy a home that is more costly than what the FHFA allows for your area. If the loan amount is more than the conforming loan limit, Fannie Mae and Freddie Mac won’t buy it, so it is a riskier loan.
As of 2024, the limit for most conforming mortgages in the US is $766,550. In certain more expensive areas, including Alaska, Hawaii, and specific US counties, the jumbo loan limit may be as high as $1,149,825. Homes that cost more than these amounts require a jumbo loan, depending on your area. The ceilings mentioned are called ‘jumbo loan limits,’ but they are just the beginning point for these nonconforming loans.
Borrowers in high cost states may be requesting more California jumbo mortgages because the prices to buy a home have risen so greatly in the Golden State. Jumbo loans are very common in other states like, Colorado, Connecticut, DC, Florida, New Jersey, New York, Maryland, and Virginia.
Is it More Difficult to Get Approved for a Jumbo Mortgage?
Jumbo mortgages generally entail stricter qualification criteria compared to conforming loans due to the increased risk for lenders. Consequently, lenders scrutinize various key factors to assess your risk level. Typically, this entails meeting higher standards for credit score, income, and cash reserves. The jumbo credit score requirements are typically higher than conventional loans.
Most jumbo mortgage lenders are looking for good to excellent credit scores or more money down. When seeking a jumbo mortgage refinance, you will need good credit scores as well, unless you have a lot of equity. Low LTV scenarios are available with jumbo mortgages if the borrower has below average credit.
Are You Required to Come Up with 20% Down-Payment on a Jumbo Mortgage Loan?
For jumbo loans, it’s usually mandated that borrowers provide a down payment of at least 10% of the home’s value. Certain lenders may even stipulate a higher down payment requirement, potentially up to 20%.
How Do You Qualify For a Jumbo Loan?
Jumbo loan lenders usually have tougher underwriting rules than for other mortgages. The loans are not purchased by Fannie or Freddie, so the lender takes a higher risk. If you want to get a jumbo loan, you have to have a strong credit and financial profile.
The following are the three qualifications for many jumbo loans:
Income
You generally need a higher income to qualify for a jumbo mortgage. Also critical is your debt-to-income or DTI ratio. This is the percentage of your income per month that services debt. If you pay more than about 1/3 of your gross monthly income for debt, you may not get a jumbo loan. You might still qualify with a top-notch credit score and plenty of reserves in the bank.
Credit Score
You need a higher credit score for a jumbo loan than conforming loans. At the least, you must have at least a 700-credit score, but 740 is common with many lenders. A few lenders report approving buyers with a 660-credit score but you will need a high income and low debt to qualify.
Down Payment
You also may need a high down payment to get a jumbo mortgage. The down payment is usually 10% or 20% and often more. If you have less than 10% down, you will almost always have a higher interest rate. You also will need to have sufficient cash reserves to pay for six or 12 mortgage payments.
Jumbo Loan Interest Rates
Jumbo loan interest rates are a bit higher than for conforming loans. Generally, jumbo mortgage loan rates are .25% to .50% higher than for conforming loans. The current jumbo loan rate as of May 2024 is around 7%, while conforming 30 year mortgages are around 6.5% or 6.75%. Obviously, your payment will be higher because the loan is larger.
Mortgage experts recommend shopping around with different lenders and programs because rates can vary significantly.
Jumbo Loan Pros and Cons
Whether you require a jumbo loan is often determined by the cost of the home you want. For example, if you want a $900,000 house, you will need a jumbo loan in most cases. But if you are thinking about a price point that is on the edge of the conforming loan limit, here are the pros and cons of jumbo loans:
Pros
Lower rates
Rates are often higher than for conforming loans. But certain lenders may offer a slightly lower rate to win your business because jumbo loans are profitable.
Borrow More Cash
If you reside in a high-cost area, a jumbo mortgage may be what you need to buy a house. For example, you can’t buy a 3,000 square foot home in the San Francisco area without a jumbo mortgage. Having a larger mortgage means you don’t have to come up with as much money down.
More Loan Options
There are many jumbo loan options, including adjustable and fixed, 15 and 30 years. There are even jumbo VA loans.
Cons
More Money Down
You will probably need to put more money down. Most jumbo loans require at least 10% down. Ten percent of $1 million, for example, is $100,000, and you may need 20%.
Higher Closing Costs And Fees
Larger loans have higher closing costs and fees. If the closing costs and fees are 5% of the loan, a $1 million loan could have $50,000 in closing costs.
Riskier Loan
Jumbo loans are nonconforming, but they still are often qualified loans, which means they must follow standards set by the Consumer Financial Protection Bureau. If you get a non-qualifying loan, there are fewer rules. So, you need to do your due diligence to ensure you are getting a fair deal.
Can I Get a VA Jumbo Loan?
Yes, the VA offers jumbo loans to qualifying service members. In fact, the VA typically doesn’t set specific loan limits, meaning the primary restriction is often based on the lender’s risk tolerance.
VA Jumbo Loan Requirements
For a VA jumbo loan, it’s possible to obtain a loan without a down payment if you have an average credit score of 640 or higher for VA loans up to $1.5 million. If your median credit score is 680 or better, you may qualify for a VA home loan up to $2.5 million.
The debt-to-income ratio required to qualify for a VA jumbo loan can vary depending on factors like loan type, credit score, and your residual income.
Jumbo Loans Vs Conventional Loans
To grasp jumbo loans, it’s important to understand the mortgage industry. Lenders originate mortgages and then sell them to mortgage investors like Fannie Mae or Freddie Mac. However, Fannie Mae and Freddie Mac are only permitted to purchase mortgages that conform to the Federal Housing Finance Agency (FHFA) limits, which excludes jumbo loans.
Once these conforming mortgages are bought, Fannie Mae and Freddie Mac bundle them with other similar loans and sell them to investors in the secondary mortgage market. A similar process occurs with jumbo mortgages, but they are sold to different investors who specialize in non-conforming loans.
Summary Jumbo Mortgages
Jumbo loans are designed for buyers with higher incomes and extensive financial resources. You generally need a high credit score, low DTI, and a minimum of six months of cash reserves to get a jumbo loan.
If you’re interested in a larger and more expensive home, you need to know what the conforming loan limit is for your county. If the home you want doesn’t fit into conforming guidelines, you may need a jumbo mortgage. This is especially the case if you live in a higher-cost county in the US.
Jumbo loans are appropriate for many higher income and credit score borrowers, but you should not get one if it will stretch you financially. If you are ready to begin looking at jumbo loans, our loan experts at BDNationwidemortgage.com look forward to working with you today.
