Before we discuss how jumbo loans work, let’s start with some key terminology.
Understanding the difference between conforming and non-conforming loans is essential when it comes to understanding jumbo loans.
Conforming loans are home loans that are equal to or less than the FHFA (Federal Housing Finance Agency) loan limit. The FHFA is more commonly called Fannie Mae and Freddie Mac.
Non-conforming loans are home loans for amounts above the FHFA loan limit. The term “jumbo loans” refers to any non-conforming loan above the FHFA limit.
These terms will make more sense as we dive into jumbo loans, how to qualify for one, and when to get one.
How do jumbo loans differ from other loans
Any loan exceeding the current Fannie Mae and Freddie Mac loan limits is a jumbo loan. In 2022, that limit is $647,200 for a single-family home in most states.
In some states, however, like Hawai’i, Alaska, Colorado, and California, FHFA loan limits can be higher to accommodate the heftier price tag of homes. In designated high-cost areas, the FHFA limit is $970,800.
Because jumbo loans are above those limits, Fannie Mae and Freddie Mac do not buy the loans, putting the sole risk on lenders if a borrower can not repay the mortgage.
The increased risk to lenders is one factor why jumbo loan requirements are often more rigorous compared to conforming loans.
For example, in addition to cash reserves, potential jumbo mortgage borrowers are generally required to have a good credit score and reliable income.
How do jumbo loans work
Banks and private lenders can offer non-conforming loans. Because these loans are not subject to the FHFA regulations, approval criteria can differ from lender to lender, making each jumbo loan a unique mortgage product.
Qualifying for a jumbo loan
Since lenders carry an increased risk with jumbo loans, borrowers must be able to prove they can repay the loan in full.
While lenders look at a borrower’s overall financial health to do this, four elements are crucial to the assessment:
- High credit score/ good credit report
- Low debt-to-income (DTI) ratio
- Good cash reserves
- Good loan-to-value (LTV) ratio
High credit scores
Your credit score lets lenders know whether you’re a financial risk. The higher your credit score, the better your financial standing.
While there’s no minimum credit score to qualify for a jumbo loan, most lenders look for a credit score of at least 680 from borrowers.
Negative elements on your credit report, such as late or missed payments, previous foreclosures, or bankruptcies, can negatively impact your jumbo loan approval.
Debt-to-income (DTI) ratio
Your DTI looks at your monthly income compared to your monthly expenses.
Lenders might worry about your ability to repay a loan if you have a high percentage of debt in comparison to your gross monthly income.
A high DTI can be especially concerning during periods of financial hardship, such as a recession.
Loan-to-value (LTV) ratio
Another calculation lenders look at when evaluating a borrower’s ability to repay a jumbo loan is the “loan to value” ratio or LTV.
Your LTV is the lower of either the home’s purchase price or the total loan amount divided by the home’s appraised value.
Cash reserves are funds you have in the bank that you set aside to potentially cover mortgage payments in an emergency.
While the specific amount of cash reserves can vary based on your loan terms, applicants should generally have enough cash reserves to cover 6-12 months of mortgage payments plus any closing costs.
What is the down payment for a jumbo loan?
Jumbo loans don’t have a one-size-fits-all down payment requirement.
Some lenders approve jumbo loan applications with a down payment totaling 10% of the home’s purchase price, while others require 20% or more. Smaller down payments typically require borrowers to pay private mortgage insurance.
Additionally, in some loan programs, like VA loans (backed by the Department of Veterans Affairs), eligible borrowers with a minimum 640 credit score can apply for a zero-down-payment jumbo loan for up to USD 1.5 million.
Another thing to remember when considering a jumbo loan down payment is how your down payment amount will affect your total mortgage.
Putting a larger chunk of cash toward on a home can help to reduce your LTV ratio while also demonstrating your ability to afford the loan. Additionally, larger down payments can mean paying less in monthly mortgage payments.
Austin Captial Mortgage offers a down payment assistance program with the following benefits:
- No income limits
- Do NOT need to be a first time buyer
- Co signers ARE allowed
- Loan limit follows FHA guidelines
- 660 minimum credit score
Jumbo loan pros and cons
Jumbo loans aren’t for everybody but some advantages include:
- Larger loan amounts allow borrowers to buy homes in high-cost areas like Austin
- A variety of options such as fixed-rate or adjustable-rate mortgages offered
Some disadvantages of jumbo loans include:
- Typically larger monthly mortgage payments and higher closing costs compared to conforming loans
- Higher credit scores and cash reserve requirements
Jumbo loan interest rates
A jumbo loan doesn’t automatically mean a jumbo interest rate. In many instances, jumbo loan interest rates can be lower than conforming loan interest rates.
Several factors impact the jumbo loan interest rate you can receive, including:
- Lender choice
- Market conditions
- Credit score
- Down payment amount
- Cash reserves
- Annual income
Mortgages come in as many different shapes and sizes as there are homes. And each borrower’s situation is equally unique.
Get your jumbo loan with Austin Capital Mortgage
At Austin Capital Mortage, we look at each borrower’s circumstances to help them determine the right loan for their unique situation.
Our online mortgage calculator can help you estimate what your monthly mortgage payments might be on a jumbo loan.
If you’ve already reviewed your finances and are interested in applying for a jumbo loan, you can apply for a mortgage quote online.
Ready to take the next step in your home buying journey? Contact one of the jumbo loan specialists at Austin Capital Mortgage today.