What are Jumbo Loans and Who Needs Them?

Dec 28, 2022

6

min read

A

jumbo house needs a jumbo loan. It does not always have to be a jumbo house though, as a typical house in California, Hawaii, and Alaska is worth half a million dollars thanks to decade-high inflation and a piping-hot real estate market. Thus, if you need a larger loan than what conventional loans can offer, a jumbo loan might be the way to go.

So, if you want to know what jumbo loans are and how to get one, let's dive in!

What Are Jumbo Loans?

As the name suggests, Jumbo loans are a type of mortgage larger than conventional conforming loans. The Federal Housing Finance Agency (FHFA) annually sets maximum conforming loan limitations. Any mortgage beyond the limit is considered a jumbo loan.

Mortgage Loan Characters — Source: Freepik

They are also called non-conforming mortgages since they don't conform to the rules and are not guaranteed by Fannie Mae and Freddie Mac. Therefore, they are riskier for lenders since they will suffer losses in the event of a borrower default. As a result, they are expensive and exclusive loans.

Features of Jumbo Loans

Jumbo loans cover larger mortgage amounts higher than the FHFA limit.
They are designed for expensive, higher-end, and luxury properties.
They are available for a primary home, second home, vacation home, and rental properties.
They are available in the form of a fixed-rate mortgage or adjustable-rate mortgage.
The mortgage rates are higher than conventional ones since they are riskier to the lender.
They have stricter underwriting guidelines such as higher credit and down payment.
Any VA loans, conventional or renovation loans, can be considered jumbo loans if they exceed the maximum loan amount limit set by the FHFA limit.

Jumbo Loan Limits for 2022

The standard conforming loan limit for 2022 is $647,200, meaning any mortgage larger than that is a jumbo loan. However, the loan limits differ per state, and actual county-level limits can vary. This is due to variations in real estate market conditions, state lending limits, and housing prices.

Home for Sale — Source: Pch.vector (Freepik)

For instance, the maximum loan restrictions are set at $970,800 in high-cost states like Alaska, Hawaii, Guam, and the U.S. Virgin Islands. Some places in other states, such as Washington D.C, Virginia, Utah, New York, and California, also fall under higher loan limits due to the expensive real estate market.

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How Do Jumbo Loans Work?

Jumbo loans work the same as conventional mortgages. The only difference is that the lending criteria are strict. The more the loan amount, the more credit risk is to the lender, and thus, requires strict lending criteria to qualify for the loan. You need a stellar credit score, a stable income, and a low debt-to-income ratio (DTI).

Who Needs Jumbo Loans?

Any borrowers willing to borrow more than the FHFA limit need jumbo loans. Since conventional loans won't offer $1 more than the limit set, you need a niche product dedicated to higher-end loans.

You need jumbo loans if you want luxury homes worth millions of dollars. Similarly, if you are looking to buy a home in a high-cost area such as California, Washington D.C., or Hawaii worth millions of dollars. In that case, jumbo loans are your only option.

Jumbo Loan Eligibility Requirements

The more the risk, the more selective lenders are with the borrowing. Since jumbo loans pose more of a risk to lenders, the eligibility criteria are stricter. The following items represent eligibility requirements that must be met:

Credit Score

You must have a stellar credit score to qualify for a jumbo loan. Generally, your FICO score needs to be higher than 700.

Debt to Income Ratio (DTI)

Your debt-to-income ratio (DTI) compares how much you owe to how much you earn. To qualify for the loan, you need to have a low DTI. It indicates to the lender that you earn enough to pay mortgage payments and have a low chance of defaulting. Generally, you need a DTI of 43% or lower.

Down Payment

Jumbo loans require high down payment than conventional loans. You must make at least 10% of the down payment, while some may require 25% or even 30%.

Cash Reserve

You must have enough cash reserve in the bank. Generally, lenders see if you have a cash reserve to cover at least one year of mortgage payments.

Good Credit History

Jumbo loans are considered high-risk. Therefore, the lender will scrutinize your financial history thoroughly. If you have a bankruptcy or foreclosure on your report, you'll have a harder time getting the loan.

Credit Report Checker — Source: Pikisuperstar (Freepik)

Appraisals

Some lenders may need two home appraisals. Generally, you need second home appraisals if you borrow more than $1.5 million.

Stable Income

To qualify for the loan, your income must be stable and consistent. When applying, be ready to provide your complete tax returns, W-2s, and 1099s, as well as bank records and details on any investment accounts you may have. With a jumbo loan, your lender may want more documents and verification that your income will not change after you get the loan.

How Do Jumbo Loans Differ From Conventional Mortgage Loans?

The main difference between a jumbo loan and a conventional loan is the loan's size and tight lending standards. Furthermore, here's how jumbo loans differ from conventional loans:

	Jumbo Loans	Conventional Loans
Definition	Jumbo loans are large-sized loans that exceed the maximum loan limits of FHFA.	Conventional loans are general loans for privately issued mortgage loans within the loan limits of FHFA.
Backed by	Not backed by Fannie Mac or Freddie Mac.	Backed by Fannie Mac or Freddie Mac.
Target group	Targeted for high-income groups.	Issued for all borrowers.
Interest rates	High-interest rates.	Low-interest rates.
Lending requirement	Strict lending requirement.	Comparatively low lending requirement.
Down payment	The minimum down payment is usually 10%.	The minimum down payment is usually 3%.
Cost	Higher closing costs and fees.	Comparatively lower closing costs and fees.
Credit score	Usually, the minimum credit score is 700.	The minimum credit score is 620.
Debt to income ratio	The debt to income ratio should be less than 43%.	The debt-to-income ratio should be less than 45%.
Cash reserve	It requires at least 1 year of homeownership expenses.	It requires 6 months of homeownership expenses.
Risk	High risk to the lender.	Low risk to the lender.

Where to Shop for Jumbo Loans?

Jumbo loans are in great demand due to skyrocketing housing prices and the piping-hot real estate market. Thus, plenty of lenders offer jumbo loans despite being exclusive loans. Here are some of our top picks:

Rocket Mortgage

Rocket Mortgage is a household name in the mortgage landscape best known for its convenience and stellar customer service. It offers a Jumbo smart loan for people who need to borrow a larger amount for their home purchase. It provides loans up to $2.5 million and a minimum credit score of 680. You will need a 2%-6% closing cost, a DTI of less than 45%, and a loan-to-value ratio of less than 89.99%.

Ally Bank

Ally bank is a leader in online banking and is one of the top choices for a wide array of services, competitive rates, and minimum balance. It also offers jumbo loans to finance high-end value primary homes, vacation homes, and investment properties. It provides a low down payment of 10% with 2 to 5% closing costs, and you can borrow up to $ 4 million. The best thing about Ally is that it charges no lender fees; the rates are transparent and easily accessible on the website.

Angel Oak Home Loans

Angel Oak Home Loans is a full-service mortgage lender offering a wide range of mortgage products, including jumbo loans, at affordable rates. It offers up to $3 million in loan amount with a down payment of 10%. What sets the lender apart from others is that it allows debt to income ratio of up to 50%, while other lenders only accept DTI up to 45%.

Bethpage Federal Credit Union

Bethpage Federal Credit Union is the largest credit union in New York, offering a comprehensive slate of loan products, including jumbo loans. It offers jumbo loans from $647,200 up to $1,500,000, helping you purchase a high-end home property. The best thing about Bethpage is that it also offers Jumbo HELOCs enabling homeowners to borrow against the value they have accumulated in their property.

PenFed Credit Union

PenFed credit union is well known federal credit union headquartered in McLean, Virginia. It empowers you to achieve financial success with its comprehensive options of mortgage products, including jumbo loans. The best thing about Penfed is that it is one of the easiest credit unions to join and offers competitive rates in the industry.

Fairway Independent Mortgage

Fairway Independent Mortgage is a Wisconsin-based mortgage company dedicated to offering great rates and the right loan option for each borrower with quick and outstanding customer service. It offers jumbo loans to fund high-end properties with a down payment as low as 10%. The best thing about this mortgage is that it provides a jumbo reverse mortgage tailored for borrowers over 62.

Axos Bank

Axos Bank is one of the nation's best online banks that offers personalized and technology-driven customer service. It provides jumbo and super jumbo loans with competitive rates, flexible terms, and tailored options up to $30 million or more. It has experienced professionals who are intimately familiar with luxury home markets and loan underwriters who understand complex financial situations. This allows you to borrow jumbo loans with ease and at affordable rates.

Movement Mortgage

Movement Mortgage is an award-winning mortgage located in Calvin Hall Road, South Carolina, offering affordable jumbo loans. The best thing about movement mortgage is its 6-7-1 process, which means upfront underwriting within six hours of submitting an application, loan processing within seven business days, and closing in one day. Thus, its quick loan and stellar customer service make it one of the top choices among several jumbo loan lenders.

Sharon View Federal Credit Union

Sharon View Federal Credit Union is geared toward helping you improve your financial standing while treating you the way you deserve. What sets it apart from other lenders is that it offers extraordinary value, 24/7 account access and control, and personalized service. Its jumbo loans enable you to go beyond conventional and easily purchase high-priced luxury homes. It finances up to 89.99% without mortgage insurance with no origination fees.

Coastal 24 Credit Union

Coastal 24 credit union is a Raleigh, North Carolina-based federal credit union offering a full spectrum of mortgage products, including jumbo loans. It offers low-cost jumbo loans to finance more expensive homes. With Coastal 24 credit union, you can borrow up to 95% of the home's value, which is higher than most lenders. Also, it charges a low underwriting fee and no document prep or credit report fees. Apart from this, it does not sell your mortgage to other lenders, so your jumbo loan is local and stays with Coastal.

Conclusion

Jumbo loans are the only option if you want to buy a house worth more than the FHFA limit. They are non-conforming and high-risk loans, as Freddie and Fannie Mac do not guarantee them. The standard limit for a jumbo loan for 2022 is $647,200, but it can change according to the high-cost area and is updated annually. Since jumbo loans are high-risk, you need a perfect credit profile and score. The mortgage rates are slightly higher, but if you shop for the rates, you can get jumbo loans at affordable rates.

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