When a Regular Mortgage Isn’t Enough
You may need a jumbo loan for homes that cost more than $510,400. Jumbo loans have stricter qualification rules.
What is a jumbo loan?
A jumbo loan is a mortgage used to finance properties that are too expensive for a conventional conforming loan. The maximum amount for a conforming loan is $510,400 in most counties, as determined by the Federal Housing Finance Agency (FHFA). Homes that exceed the local conforming loan limit require a jumbo loan.
Also called Non-Conforming Conventional Mortgages, jumbo loans are considered riskier for lenders because these loans can’t be guaranteed by Fannie and Freddie, meaning the lender is not protected from losses if a borrower defaults. Jumbo loans are typically available with either a fixed interest rate or an adjustable rate, and they come with a variety of terms.
Qualifying for a Jumbo Loan
Underwriting criteria for jumbo loans are stricter because the loans are larger and riskier for lenders.
Lenders may require your FICO score to be higher than 700, and sometimes as high as 720, to qualify for a jumbo loan.
Debt-to-Income Ratio (DTI)
Lenders will also consider your debt-to-income ratio (DTI) to ensure you don’t become over-leveraged, though they may be more flexible if you have plentiful cash reserves. Some lenders have a hard cap of 45% DTI, however.
You’re more likely to be approved for a jumbo loan if you have ample cash in the bank. It’s not uncommon for lenders to ask jumbo loan borrowers to show they have enough cash reserves to cover one year of mortgage payments.
To prove your financial health, you’ll need extensive documentation, perhaps more than for a conforming loan. You should be prepared to hand over your full tax returns, W-2s and 1099s when applying, in addition to bank statements and information on any investment accounts.
Some lenders may require a second appraisal of the home you’re planning to purchase.
Jumbo Loans vs. Conforming Loans
The key difference between a jumbo mortgage and a conforming loan is the size of the loan. For a thorough look at the two, and the pros and cons of each, read about the differences between conforming and nonconforming loans.
Among the other factors that differentiate jumbo loans from conforming loans:
Heftier down payment
While low down payments are fairly common on conforming loans, jumbo loans are more likely to require a down payment of at least 20%, though some lenders may go as low as 10%.
Potentially Higher Interest Rates
Jumbo mortgage rates may be slightly higher than those on conforming loans, depending on the lender and your financial situation. However, many lenders can offer jumbo loan rates that are competitive with rates on conforming loans — and some may even offer slightly lower rates depending on market conditions, so make sure to shop around.
Higher Closing Costs and Fees
Because jumbo loans are bigger and there are some extra qualifying steps, expect higher costs at the closing table.
The loan limit for conforming loans varies by county because some real estate markets are much pricier than others. For 2020, the conforming loan limit for one-unit homes in most counties nationwide is $510,400. However, in “high-cost areas,” especially in the Northeast and on the West Coast, conforming loan limits are expanded to $765,600 and even higher in a few other places.
Jumbo Loan Requirements
What you need to qualify for this loan will depend on what type of jumbo loan you’re getting and the amount you need to borrow. There are a few loan types we’ll go over:
- Home purchase
- Rate or term refinance
- Cash-out refinance
- Investment property purchase or refinance
- Land purchase
Jumbo Loan Cash-Out Refinance Requirements
If you have a primary, one-unit property, you can take cash out with a jumbo loan refinance. However, there are limits to how much cash you can take out, depending on how much equity you have in your home. These limits are as follows:
- If you have less than 40% equity in your home, you can take out up to $350,000.
- If you have between 40% and 50% equity in your home, you can take out up to $500,000.
- If you have 50% or more equity in your home, you can take out up to $750,000.
Whatever the amount of cash you take out in your refinance, you must leave a certain amount of equity in the home. For loan amounts up to $1 million, you must leave a minimum of 20% equity in the home. You can take cash out on loan amounts up to $2 million, but you’ll need to leave more equity in the home (up to 30%).
Jumbo Loan On An Investment Property
If you’re looking to purchase or do a rate-term refinance on an investment property, you can do so with a jumbo loan. Here are the details:
- The property must be one or two units.
- You need to have a 40% down payment or equity stake in the property.
- The loan amount can be up to $1 million.
- Your DTI should be no greater than 43% with a minimum median FICO® Score of 760 or better.
Jumbo Loan On The Purchase Of Land
Whether you’re purchasing or refinancing, you may use a jumbo loan for a home on up to 40 acres of land. However, there are certain requirements you should be aware of if you’re getting a property with more than 20 acres of land.
First, your down payment or equity amount must be 10% more than it would be for properties with 20 acres or fewer. For example, if you were purchasing a one-unit primary jumbo property with a loan amount of $1 million or less, your down payment would have to be 20% instead of 10%.
Second, the appraiser must be able to find at least two comparable properties in the area with land amounts that are no less than 5 acres below the acreage you’re financing. That means, if you were getting a mortgage on a home with 35 acres, two comparable homes would have to be found with at least 30 acres of land.
Also, the value of the land itself cannot make up more than 35% of the overall appraised value of the land and the home.
For the sake of convenient math, let’s say you were financing a home with an overall appraised value of $1 million. No more than $350,000 of that appraised value can be based on the value of the site itself.
Finally, the land can’t be zoned for agricultural use.
VA Jumbo Loans
Veterans or active members of the U.S. military can qualify for VA jumbo loans if they’re interested in purchasing homes that exceed the standard loan limits of their area. However, the requirements for VA jumbo loans are a bit more restrictive than they are for typical VA loans.
For VA loans, borrowers need to have a minimum FICO® Score of 620, but they don’t need a down payment. This is not the case for VA jumbo loans. To qualify for these higher loans, borrowers must have a minimum score of 640 and may need to make a down payment.
If you don’t want to make a down payment on a VA jumbo loan, the median credit score necessary is 740. A 680 median FICO® Score will allow you to make a 5% down payment. With a 640 median FICO®, the down payment is 10%. It’s important to note that other lenders may have different policies.
If you have an impacted entitlement, meaning you have a partial entitlement but not the full amount, different down payment guidelines apply. We suggest speaking with a one of our Loan Expert.
Is A Jumbo Loan Right For You?
If you’re trying to determine whether a jumbo loan is right for you, you should first consider whether you truly need one. Remember, the conforming loan limit is $510,400 – and up to $765,600 in high-cost areas, like California, New York and Hawaii. If the property you’re interested in exceeds the limit for your area, you should see if making a higher down payment will make up for the difference.
Assuming that you still require a higher loan amount, you must next consider your financials. Jumbo loans come with higher monthly payments. If you feel you can afford to make these higher payments comfortably, just make sure that you have a high credit score and low DTI.
A Jumbo loan can be the solution you need to pay for that perfect home. If you’re ready to get started, call one of our Loan Experts at 305-742-8179 or send us an email to: Contact@MaraidLending.com We are ready to help you.