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Jumbo Home Loans: Your Complete Mortgage Guide

Jumbo Home Loans: Your Complete Mortgage Guide

June 22, 2022 by X2 Mortgage

Jumbo mortgages are quite popular because they allow borrowers to purchase homes that would otherwise be out of reach. However, while it gives more money for your home purchase, it also has tougher qualifying guidelines than a conforming loan.

But these conditions are not impossible to meet; otherwise, thousands of Americans would not have benefited from this loan to purchase their dream home.

If you want to take out a jumbo loan, this guide will tell you everything you need to know. We'll cover the scope and requirements of these loans and some alternatives. This will help you decide if a jumbo loan is right for you.


What is a Jumbo Loan?

A jumbo loan is any type of home loan whose borrowing amount exceeds the restrictions set by the Federal Housing Finance Agency (FHFA). 

As of May 2022, the loan limit set for a single-family home in most parts of the United States is $647,200 for conforming loans. So, any loan that gives a loan amount more than the maximum loan sum allowed for conforming loans is a jumbo loan. In other words, a jumbo loan is a non-conforming loan. 

Typically, Jumbo loans are designed for high-income individuals seeking to purchase primary luxury residences, investment properties, or vacation houses in high-value areas of the country. As a result, not everyone can meet the loan requirement. 


How is a Jumbo Loan Different from a Conforming Loan?

Jumbo loans are a type of conventional loan that anyone who qualifies can get. There are two types of conventional loans: conforming and non-conforming.

A Conforming Conventional Loan

These loans meet certain criteria of A Fannie Mae or Freddie Mac. Fannie Mae and Freddie Mac are government-sponsored firms buying and selling mortgages to investors. As a result, they establish the guidelines for obtaining the loan and the maximum amount of loan that a lender may provide. 

In most parts of the country, the maximum loan amount for a conforming loan is $647,200. However, in high-value places such as California, Alaska, and Hawaii, the loan limit for a single-family house can be up to $970,800.

Non-conforming Conventional Loans

These loans are not regulated by Fannie Mae or Freddie Mac and cannot be sold to them. As a result, lenders are free to issue loan amounts that exceed the limits set by these firms and impose their own regulations. A typical example of a non-conforming loan is a Jumbo loan.

Jumbo loans are often aimed at the high-value market. Because lenders want to make a lot of money, high-income individuals are the best prospects for jumbo loans of up to $2.5 million and, in some cases, up to $3 million.

Other key differences between a jumbo loan and a conforming loan include:

  • Jumbo loans are not backed by Fannie Mae or Freddie Mac, making them riskier for lenders.

  • Jumbo loans have stricter underwriting guidelines than conforming loans. For example, when granting a jumbo loan, lenders want a higher credit score, a better credit record, and more financial documents than required in a conforming loan.

  • Jumbo loans are more challenging to find and qualify for than conforming loans.


What Are The Requirements Of A Jumbo Loan?

You must satisfy certain vital requirements to be approved for a jumbo loan. However, these terms may differ from one lender to the next:

1.  Down Payment

Lenders always need a down payment for approval of the loan. The down payment you make will affect the interest rate you get on the loan. The less you pay for the down payment, the higher the interest rate will be.

Jumbo loan down payments usually ranges from 10% to 20% of the home's value. The amount you'll need to put down is determined by the size of the loan and your credit score, however, there are some programs that allow for a 5% down jumbo loan or even a 3.5% down jumbo loan.

2.  Credit Score

Your credit score is very important in the loan application process. Lenders want to know how reliable you are as a borrower, and your credit score is the way to demonstrate this. So, to qualify for a jumbo loan, you must have strong credit. 

In most circumstances, lenders want a FICO score of at least 700 and, in some cases, up to 720. This is higher than what is required in conforming loans, and in rare cases can credit be in the 620-680 range on these.

In addition to your credit score, a lender will also look at your credit report. Bad credit history can result in being denied a loan, even if you have a good credit score. This can include past due mortgage payments, bankruptcy, or foreclosures.

3.  Debt-To-Income Ratio

Another essential requirement in the loan application process is your DTI. The debt-to-income ratio (DTI) compares your monthly debt payments to your monthly pre-tax income.

Lenders want to know if your monthly income exceeds your monthly debt. As a result, to qualify for a Jumbo loan, you must have a DTI of 45% or less.

A low DTI can compensate for a low credit score, just as a good credit score can compensate for a high DTI. However, it is always preferable to have strong credit and a low DTI when applying for a jumbo loan.

4.  Financial Documents

Lenders will also often demand you provide proof of your financial health through tax returns, W-2s, and 1099s. In addition, you may be required to provide bank statements and details on any investment accounts.

The following are the financial documents necessary for jumbo loan approval:

  • Tax returns from the last 2-3 years

  • W-2 or 1099 statements from the previous 2-3 years

  • Bank statements from the last 2-3 years
  • Information on investment accounts and other assets

5.  Cash Reserve

In addition to demonstrating your financial stability. Lenders want you to show that you can make consistent, regular payments even if you lose your job or have other financial difficulties throughout the loan period.

As a result, you must demonstrate that you have sufficient reserves or liquid assets to support at least one year of mortgage payments, including cash in your bank account, retirement account, business, and gift funds.

6.  Closing Costs

Depending on the mortgage size, jumbo loans have additional closing charges of up to 7%. This is higher than what you are charged in a conforming loan which ranges between 2% and 5%, depending on the loan amount.


Pros and Cons of a Jumbo Loan

A jumbo loan can provide several advantages over other types of loans, but it's also essential to be aware of the potential drawbacks before making a decision. 


1.  Higher Loan Amount

Jumbo loans offer borrowers the advantage of accessing higher loan amounts than any other type of loan. This can be highly beneficial to those looking to finance a large purchase or project like buying a high-priced real estate in a high-value location.

For example, if you need to finance a $1.5 million home, a jumbo loan can give you a loan amount of up to $1.2 million. However, the maximum loan amount for a jumbo mortgage varies by lender and location. 

2.  Multiple Mortgage Purpose

A jumbo loan can be used to finance a range of properties, including a primary residence, a second house, an investment property, or a vacation home. This flexibility is a significant benefit of jumbo loans over VA and USDA loans, which are restricted to certain types of properties or areas.

3.  Good for High-Income Individuals

If you have high-income employment or business, a solid credit score, a good financial history, and enough money in the bank to cover the down payment and loan repayment for the first year, a jumbo loan might be a suitable way to begin your real estate investment.

4.  Flexible Loan Terms

The terms of a jumbo loan can be fixed-rate or adjustable-rate, and repayment terms can be negotiated with the lender. For example, you might get a 30-year fixed-rate loan or an adjustable-rate loan for the same loan period.

5.  Low Down Payment

If you have a credit score of at least 720, some lenders may require as little as a 10% down payment. But, remember that a lesser down payment means a larger loan to value and a higher mortgage interest rate.


1.  Higher Risk for Lenders

The Federal Housing Administration, Fannie Mae, and Freddie Mac do not guarantee jumbo loans. And this is a disadvantage for the lender, who has no recourse if you default on your loan.

2.  Harder to Qualify

Because jumbo loan lenders take a bigger risk, they typically have tougher requirements and paperwork to qualify for the loan. As a result, lenders need better credit scores, larger down payments, more financial papers, and a sufficient cash reserve.

3.  More Financial Commitment

If your credit score is 680 or lower, you may have difficulty qualifying for a jumbo loan. And even if you do, you'll need to pay a higher down payment to compensate. 

This is a larger financial commitment on your side than you would make with other types of loans. For example, if you need to finance a $1.5 million home, you may need up to $500,000 to cover the down payment, closing costs, and cash reserve before you can qualify for a jumbo loan.

4.  Higher Interest Rates

Although not always the case, most lenders charge a higher interest rate on jumbo loans to compensate for the risk.

5.  Smaller Market

Jumbo loans are not available from all lenders. As a result, finding a jumbo loan lender tends to be more difficult than finding a conforming loan lender. This might cost you more in a highly competitive market.

6.  Higher Risk of Foreclosure

The monthly payment for a jumbo mortgage might be too expensive for some borrowers. In addition, if the value of your property declines, it may be a negative investment, and you may lose equity in your home. 

Also, if you have a difficult financial situation, you may start to fall behind on your mortgage payments, thereby increasing your chances of foreclosure.


Alternatives to a Jumbo Loan

Perhaps after reviewing the requirements for obtaining a jumbo loan, you discover you may not qualify for the loan or cannot bear the financial strain. Don't worry; you're not alone, and your dream of purchasing a luxury home is still attainable.

Here are some viable alternatives to jumbo loans

Non-Qualified Mortgage 

A non-qualified mortgage is a non-conforming loan (such as jumbo loans) with no loan limit. This loan is intended to assist home buyers who cannot fulfill the stringent requirements of a qualifying mortgage. 

It can also be an excellent alternative for Jumbo Loans for borrowers with less-than-perfect credit, an imperfect credit history, and self-employed borrowers who do not wish to furnish income tax returns.

So, if you are unable to fulfill the standards of a jumbo loan as outlined earlier, a Non-Qualified Mortgage can provide you with enough funds with: 

  • A bank statement instead of tax returns

  • Lower credit score than required for a jumbo loan

  • Up to 50% debt to income ratios
  • 10% to 20% down payment depending on your credit score.

  • No private mortgage insurance.

A Piggyback Mortgage

A piggyback loan is another option for avoiding a jumbo loan's expensive requirements and hardship. A piggyback loan, often known as an 80-10-10 mortgage, allows you to purchase a property with two loans. 

The first loan, which could be an FHA Loan or a Conventional Loan, will cover 80% of the home's price, and the second loan, which could be a second mortgage or a Home Equity Line Of Credit (HELOC), will cover 10% of the home's price, with your down payment covering the remaining 10%.

These are the preferred loan programs that we'll do at X2 Mortgage when the loan amount desired is just over the conforming loan limit.


Is A Jumbo Loan Right For You?

Your unique circumstance will determine if a jumbo loan is appropriate for you. When trying to finance or refinance a property, you must carefully analyze your alternatives because each loan has its own perks and features. 

As you've seen in this guide, a Jumbo loan has advantages and disadvantages. So, before applying for a jumbo loan, you should thoroughly assess your financial situation. 

That said, if you have enough money to afford the monthly loan, you might choose a jumbo loan. 

However, you should ensure the property you intend to finance with the loan should be in a high-value area, such as California, New York City, Columbia, Alaska, or Hawaii. This way, you can be confident that you are making a solid investment because real estate in these locations tends to appreciate faster.

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