Borrowers seeking to either purchase a luxury home or a high-value property may require a jumbo loan for financing.

What is considered a jumbo loan?

Jumbo Loans at a Glance

  • Ideal for luxury or high-value properties
  • Non-conforming and riskier to lenders
  • Credit requirements are more stringent
  • Interest rates vary and can be competitive

A jumbo loan is a mortgage for higher loan amounts that exceed the maximum conforming loan limits of an area.

The Federal Housing Finance Agency (FHFA) sets these limits based on the average U.S. home price, and loans within these limits are considered conforming.

In most of the US, the maximum loan limit for a single-family home is $484,350. In high-cost areas, the maximum loan limit is $726,525. This limit is also set for Alaska, Guam, Hawaii, and the U.S. Virgin Islands. Loans that exceed these limits are considered jumbo loans and are therefore non-conforming.

Maximum Loan Amount for 2019

Units Standard High-Cost
1 $484,350 $726,525
2 $620,200 $930,300
3 $749,650 $1,124,475
4 $931,600 $1,397,400

Conforming vs. Non-Conforming Loans

The difference between conforming and non-conforming loans is the ability to sell the loans to investors.

Fannie Mae and Freddie Mac, two government-sponsored enterprises regulated by the FHFA, purchase conforming, conventional loans from lenders and package them into mortgage-backed securities (MBS) that are later sold on the secondary market. Jumbo loans, as conventional, non-conforming loans, are ineligible for purchase because they do not meet Fannie Mae and Freddie Mac’s standards.

A conventional mortgage is a loan that is privately funded and not insured by the government, such as an FHA loan or VA loan. Conventional loans include both conforming and non-conforming loans.

What are the qualifications for a jumbo loan?

Because Fannie Mae or Freddie Mac cannot purchase jumbo loans, lenders consider these loans riskier than conforming mortgage loans. Consequently, lenders mitigate the risks by imposing stringent approval requirements. The process can be more demanding because jumbo loans require additional documentation than most conforming loan amounts.

While requirements will vary from lender to lender, borrowers can expect the following criteria:

  • Stellar credit score. Lenders may require a minimum credit score of 700 to qualify for a jumbo loan.
  • Low debt-to-income ratio. Most lenders want to see a DTI around 43% or lower to be confident the borrower can repay the loan.
  • Large down payment. Some lenders will work with a 10% down payment or lower for jumbo loans, but borrowers should expect to pay at least 20% to avoid private mortgage insurance and save money.
  • High cash reserve. Lenders want to see cash on hand equivalent to a year or more of expenses.
  • Healthy finances. Lenders want to see a borrower’s total assets, a history of employment, proof of income, and a strong credit history proving financial responsibility.
  • Second appraisal. Lenders may require a second appraisal to be certain a borrower is not overpaying.

What are jumbo loan interest rates?

Interest rates for jumbo loans may be higher than conventional loans because of the larger loan amount. As of November 2019, the interest rate for a 30-year fixed-rate mortgage is 3.72%. For a 30-year fixed-rate jumbo loan, it is 4.07%. However, jumbo loan rates vary widely. Many lenders offer jumbo loans at lower interest rates than conventional loans.

Loans are available at either fixed or variable rates.

Tax Breaks

Before Congress passed the Tax Cuts and Jobs Act, homeowners could deduct the mortgage interest they paid from their taxes on up to $1 million in debt. For borrowers who obtain a mortgage after Dec. 14, 2017, the law capped the amount to $750,000 for newly purchased homes. What this means is loans above the cap will cost homeowners more money over time.

High-Balance Loans

Borrowers in approved, high-cost counties may have the option of choosing a high-balance loan over a jumbo loan. A high-balance loan is ideal for amounts above the conforming loan limit but below the maximum limit of the area in which the property is located. Unlike a jumbo loan, a high-balance loan conforms with Fannie Mae and Freddie Mac’s guidelines. High-balance loans often have lower loan costs than jumbo loans. They may be ideal for borrowers who live in high-cost areas of the U.S. but do not want or cannot afford a jumbo loan.

Final Word

Jumbo loans are used to finance properties above the conforming limits of a specific area. Approval requirements are stricter, so qualified borrowers generally make sufficient income, have excellent credit, and are financially stable. While jumbo loan rates can be high, many banks do offer competitive rates in order to market other financial products to this segment of high-earning borrowers.

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