If you’re planning on purchasing a high-priced home and leveraging the majority of the money to pay for it, you’ll likely need a jumbo mortgage.
Almost 90% of mortgages are backed by either one of two major government-sponsored enterprises: Fannie Mae and Freddie Mac. Part of the remaining 10% are considered jumbo mortgages, a home loan option for expensive homes that approach the $1 million mark and beyond.
What is Considered a Jumbo Loan?
It’s helpful to first understand what conforming loans are. Fannie Mae and Freddie Mac guarantee mortgages as a means of freeing up liquidity for banks so these financial institutions can underwrite more loans to the average consumer. The mortgage needs to meet specific securitization guidelines and limits in order to get these government guarantees. Home loans within these limits are classified as “conforming” loans.
One of the most important requirements for a conforming loan is the amount of the mortgage. In most parts of the US, the limit for conforming home loans is $417,000 for a single-unit home. In certain high-priced markets, such as New York City or San Francisco, the limit jumps to $625,500.
Out of the 3,143 counties in the US, this is how the current loan limit is broken down:
- 2,916 counties have a cap of $417,000;
- 108 counties have a cap of $625,500;
- 115 counties have a cap that’s somewhere between $417,000 and $625,500 (these markets have home prices that are higher than average, but not as high as San Francisco, for example);
- 4 of the 5 counties in Hawaii have caps that fall somewhere between $657,800 and $721,050.
In general, any home loan that surpasses the above-mentioned limits is classified as a jumbo mortgage, and is typically used to buy an expensive home. These types of loans are considered “non-conforming” because they exceed Fannie Mae and Freddie Mac’s caps. These government agencies’ requirements don’t apply to jumbo mortgages, nor can they ever purchase them. Fannie Mae and Freddie Mac only buy loans that meet their guidelines for down payment, credit score, and loan size.
Getting Approved For a Jumbo Loan
Following the housing crisis in 2008, the requirements to get approved for a jumbo mortgage were pretty stringent, but jumbo approvals have become more lax and flexible these days.
For starters, down payments on non-conforming can now be as low as 10% for mortgage amounts of $1 million, as opposed to the minimum 20% that was required years ago. Not only that, jumbo loans don’t necessarily require mortgage insurance, unlike conforming loans.
However, borrowers will typically need to pay a slightly higher interest rate – usually about 0.25% higher – compared to conforming loans, and debt-to-income ratios for such low down payment jumbo loans must be between 30% to 36%.
If, on the other hand, at least 20% is put down, lenders may accept higher debt-to-income ratios. Your total monthly housing payment along with all your other monthly bills will be calculated. If it isn’t more than 43% of your income, you may still be approved.
Your credit score also plays a key role in your eligibility for a jumbo loan, just like it does with conforming loans. If your score is less than 680, you’ll have a tough time getting approved for any type of home loan.
Lenders typically like to see credit scores of at least 720 for borrowers applying for jumbo loans. Some banks want to see scores even higher than that. Of course, the higher your score, the better. If your score is at least 780, you’re almost guaranteed approval and the lowest interest rate.
Your reserves – or the money you’ve got left over after your mortgage closes – will be closely looked at by your lender. The requirements for jumbo loans are more strict compared to conforming loans.
Lenders will usually want to see 12 months of reserves after the mortgage closes – half of the money needs to be liquid, and the other half will be calculated from any of your retirement assets. If you’re putting a high down payment and have a low debt-to-income ratio, you may be exempt from this rule.
The Bottom Line
A jumbo loan just might be the ideal solution for your particular financial situation, especially if you’re looking at buying a pricey residence. It’s worthwhile to shop around for a jumbo mortgage, just like any other type of mortgage, to make sure you get the best rate and terms on your overall home loan package. Get yourself a trusted mortgage specialist who will do all that legwork for you.