Jumbo loans, sometimes known as “super conforming loans,” are mortgages used to fund purchases of homes that cost more than the maximum allowed by the industry standard. According to the Federal Housing Finance Agency, the conforming loan ceiling is $726,200 in most counties (FHA). A jumbo loan is necessary if the purchase price of the home is more than the maximum allowed by the local conforming loan limit.
Jumbo loans, also known as non-conforming conventional mortgages, are riskier for lenders since they are not insured by Fannie Mae or Freddie Mac. This leaves the lender vulnerable to losses in the event of a borrower default. Jumbo loans may have a number of terms and conditions, including a fixed or variable interest rate.
The Requirements for Obtaining a Jumbo Loan
Because jumbo loans are so much bigger and riskier for lenders, they have tighter underwriting requirements. Let's find out about these requirements and learn more about jumbo loans.
The Importance of Your Credit Rating
In order to be approved for a jumbo loan, your FICO score will likely need to be higher than 700, and some lenders may even need a score of 720 or higher.
Comparing debt levels to disposable income
Your debt-to-income ratio (DTI) will be evaluated so that you don't wind up over-leveraged; however, lenders may be more lenient if you have a large emergency fund. However, there are certain lenders who have a strict limit of 45% DTI.
Money in the bank
If you have a large savings account, you will have an easier time being accepted for a jumbo loan. To qualify for a jumbo loan, applicants often need to prove they have access to at least one year's worth of mortgage payments in savings.
Extensive evidence will be required to establish your financial health, much more so than for a conforming loan. When applying, be ready to provide your entire tax returns, W-2s, and 1099s, as well as bank records and details on any investment accounts you may have.
Depending on the lender, a second home appraisal may be necessary before they will approve your loan.
Conforming loans vs. jumbo loans
The size of the loan is the primary determining factor in whether a mortgage is considered jumbo or conforming. Learn more about the distinctions between conforming and nonconforming loans, as well as the benefits and drawbacks of each, by reading this.
Other than those mentioned above, the following distinguishes jumbo loans from conforming ones:
- Increased initial investment
For conforming loans, a low down payment is typical, but for jumbo loans, a down payment of at least 20% is typically required, though some lenders may accept 10%.
- Possibility of a rise in interest rates
The interest rate you pay on a jumbo mortgage will depend on the lender you choose and your personal financial situation. If you need a jumbo loan, you should know that many lenders offer rates that are at least as low as or lower than the rates on conforming loans, so it pays to shop around.
- Additional charges for the closing
A higher closing cost is to be expected for a jumbo loan due to the larger loan amount and more stringent requirements for qualification.
Due to the vast price disparity between counties, the conforming loan limit is not the same everywhere. For a single-family home in 2022, the maximum loan amount that can be guaranteed by a lender in the majority of the country is $726,200. The maximum loan amount for a conventional mortgage is currently $1,000,000; however, in “high-cost areas,” such as the Northeast and the West Coast, this amount is increased to $1,089,300 (and even higher in a few other places).