Jumbo Loans: Requirements and Guidelines
What You Should Know
- Jumbo loans are used when the required mortgage amount exceeds the conforming loan limit set by Federal Housing Finance Agency (FHFA).
- Jumbo loans have stricter eligibility requirements and higher mortgage rates than conforming loans.
- Conforming loan limits vary by county to match the cost of living in the area.
- Conforming loan limits can only remain the same or increase over time.
What is a Jumbo Loan or Jumbo Mortgage?
Jumbo loans are a type of conventional or private mortgage financing that exceeds Conforming Loan Limits (CLL) set by the FHFA and are therefore uninsured by any government agencies. They are used to finance more expensive or high-end properties. The baseline limit for 2021 is $548,250, which is used in most counties.
Jumbo Loans, also known as non-conforming loans, are mortgages with principal amounts larger than the conforming loan limits. Conforming limits are set by the Federal Housing Finance Association (FHFA), and it outlines the maximum mortgage size for a specific area. Jumbo loans are too large to be insured by government-sponsored agencies and usually have a higher mortgage interest rate as compared to conventional loans.
For example, if the conforming loan limit in your area is $548,250 and the mortgage amount is $600,000, then it is considered a jumbo loan. Conforming home loans are within the conforming limits set by the FHFA and can be guaranteed by government agencies such as the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). Jumbo loans, like conventional loans, also have the option of a fixed interest rate or variable interest rate. FHA Home loans, VA Loans, and USDA loans are all examples of government loan programs that are only applicable to conforming loans.
Conforming loans are much riskier to lenders because normally, lenders will sell your mortgage to Fannie Mae or Freddie Mac and their risk will be lessened. However, with a jumbo loan, not only do lenders have no safety net, they’re dealing with a larger amount of money per home buyer. If you fall behind on your mortgage payments or default on your mortgage, lenders could lose a considerable amount of money. This is why lenders will charge a higher mortgage rate and have much more rigorous eligibility requirements.
How are Conventional Loans and Jumbo Loans Related?
Conventional loans are mortgages that are used by the average homebuyer, these mortgages can be conforming or non-conforming. “Conventional” is a broad term encompassing any non-government or private loans. If they are conforming then they fit the guidelines set by the Federal Housing Finance Association, and if they are non-conforming, they do not meet these requirements. Conforming loans can be insured by government agencies such as Fannie Mae and Freddie Mac, whereas non-conforming loans cannot.
Jumbo loans are a type of conventional loans that are non-conforming as they do not meet the requirements set by the FHFA. They specifically do not meet the conforming loan limit requirement, which states that the price of the home must be below a certain threshold for that specific area.
In What Cases Are Jumbo Loans Used?
Jumbo Loans cater to expensive and luxury properties in locations where housing prices are rising at a rapid pace such as New York and Los Angeles. These loans are different from conventional conforming loans and have stricter requirements such as a higher minimum down payment and certain tax implications. For example, if the conforming limit is $550,000 in a specific county and a mortgage is $600,000, then it has to be a jumbo loan as it is beyond the limit and too large to be insured by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). This means that if the borrower defaults, the lender is not protected from any losses by Fannie Mae and Freddie Mac.
Jumbo Loan Interest Rates
Using your credit report, financial history, and current financial situation, lenders will take their base mortgage rate displayed on their website and adjust it based on how risky of a borrower you are. If you take out a jumbo loan, then your risk to the lender increases. With the same finances, the lender may charge you a higher interest rate. In the past, jumbo loans carried rates that were 1-2 percentage points higher, but recently, jumbo loan rates have been very close to conventional mortgage rates. It might be useful to assess possible monthly payments with a jumbo loan calculator before choosing to get this type of loan.
While the risk for the same borrower on a jumbo loan is higher, most people who take out jumbo loans are in good financial standing and therefore, the risk to lenders on average can be lower than with conventional mortgages with looser requirements. Furthermore, government-sponsored agencies can’t insure jumbo loans but other financial institutions can and often do. As an individual borrower, you should expect higher mortgage rates on your jumbo loan even if you see lower average jumbo loan rates than conventional mortgage rates.
How Do I Apply for a Jumbo Loan?
The procedure for obtaining a jumbo loan is very similar to the conventional loan application process.
- Get Your Financials in Order: The first step to obtaining a jumbo loan is to get your financials in order - credit score, savings, cash liquidity, debt, and income statements.
- Find a Lender: The next step is to find a mortgage lender; this is important as different lenders have different requirements and it is important to choose a lender that best fits your needs. You can use the services of a mortgage broker to help you attain the best rate from the lender.
- Pre-Approval: Once you choose a lender, the pre-approval process is the third step. A mortgage pre-approval is essential as it will give you an idea of the size of the jumbo mortgage and the price of the home you can afford.
- Eligibility: Once the application is submitted, your lender will determine your final eligibility for the jumbo loan.
Check how much you can get pre-approved for using our pre-approval calculator.
Jumbo Loan Eligibility Requirements
Jumbo Loans have stricter eligibility requirements compared to conventional conforming loans because these loans are riskier. Jumbo loans are not guaranteed by Fannie Mae & Freddie Mac and are larger than conventional loans, which increases the potential loss to the lender if the borrower defaults. Most requirements are similar to conventional loans but slightly stricter:
- Credit Score – As the loan size is larger, lenders require a minimum credit score of 700 instead of the regular 620. The credit score requirement can vary depending on the size of the loan: a loan under $1 million will require a score of at least 700; a loan between $1million and $1.5 million will require at least 720; loans greater than $1.5 million will require a credit score of at least 740. You need a higher credit score because lenders need additional assurance that the mortgage amount can be paid back. If you are buying a home with bad credit, you should consider other loan types such as FHA, VA, or USDA loans.
- Minimum Down Payment – The minimum down payment on jumbo loans is at least 20% of the home price. There are exceptional cases where a minimum down payment of 10% is allowed but that is up to the lender. You will be required to get Private Mortgage Insurance when the down payment is less than 20%.
- Debt to Income Ratio – Your debt-to-income ratio (DTI) must be less than 43%, and some lenders require it to be closer to 36%. This means that your monthly debt payments including student loan and credit card debt payments must be less than 36% of your gross monthly income. Not only that, your DTI will include your potential monthly mortgage payments.
- Cash Reserves – There must be enough cash in your bank account to cover one year’s worth of mortgage payments. This requirement ensures the lender for 12 months of stable payments as there is limited risk for this period. Greater cash reserves increase your chances of being approved by the lender.
- Documentation – Adequate documentation regarding your employment, tax returns, and investment accounts will be required. Self-employed individuals will be required to show more documents depending on the lender.
Your mortgage interest payments can be claimed in your tax return as itemized deductions, but there are limits to the size of the mortgage and the amount that can be deducted. Before December 14th, 2017 the tax-deductible amount could be interest accrued on a mortgage of $1 million. Following the Tax Cuts and Jobs Act, the IRS reduced the deduction limit on interest to a mortgage size of $750,000. Therefore, any mortgage interest amount on debt greater than $750,000 cannot be claimed as an itemized deduction.
For example, if you have a jumbo loan of $1 million, and you accrue a total interest of $40,000 in the year, you will only be able to claim an itemized deduction on interest for $750,000 of your mortgage which is $30,000. The example shows that even though the total interest is $40,000, the maximum itemized interest deduction can only be $30,000 because of the $750,000 limit.
What is a High Balance Loan?
A high balance loan is a loan amount that exceeds the 2021 base loan limit of $548,250 but is below the higher loan limit of $822,375. High balance loans are still conforming loans as they are within the limits set by the FHFA and can be insured by Fannie Mae and Freddie Mac. For example, if you are planning to buy a home in New York City, the loan limit is $822,375 as it is a high-cost area and to purchase a home, assume you need a mortgage loan of $700,000, this amount is greater than the average loan limit of $548,250 but less than $822,375, therefore, it is a high balance loan. In the same example, if you change the mortgage amount to $850,000 then it becomes a jumbo loan as it exceeds even the higher limit of $822,375.
Alternatives to a Conventional Jumbo Loan
There are a few alternatives to a conventional jumbo loan that eligible individuals may benefit from. The alternatives to conventional jumbo loans are offered by the Federal Housing Administration and the Department of Veteran Affairs. Both loan products have stricter requirements than conventional jumbo loans, but they usually have a lower interest rate because they are insured by government agencies.
The Federal Housing Administration provides FHA Jumbo Loans to qualifying individuals through lenders. With an FHA jumbo loan, a qualifying individual can purchase a property with a down payment as low as 3.5%. Unlike regular FHA loans, the requirements for FHA jumbo loans are set by lenders, so they may vary depending on the lender. Some of the most common requirements set by the lenders for FHA jumbo loans are as follows:
- The borrower must pay all closing costs and at least 3.5% of the sale price as a down payment.
- Standard FHA guidelines and regulations apply, but many lenders require a minimum credit score of 580.
- Depending on the loan amount, the required credit score may increase to 600 for large mortgage balances and reach 640 for cash-out refinance.
- Maximum Debt-to-Income (DTI) ratio of 43%.
- No down payment assistance on loan amounts over $484,350.
- Declining Markets: Two appraisals will be required when the loan amount, excluding upfront MIP, will exceed $484,350 and the LTV equal to or greater than 95%.
The Department of Veteran Affairs also provides their type of jumbo loan called VA Jumbo Loan. VA jumbo loans are available for eligible veterans and servicemen. These loans offer significant benefits compared to traditional jumbo loans available to the public. VA loans are known for their no down payment requirement, which means that an eligible buyer can get a VA loan and pay 0% down payment for the property. VA jumbo loans also have that feature, which means that eligible buyers can still get a property paying 0% down payment even if their property is above the VA loan limits. Even though there is no set limit for VA jumbo loans, the limits and regulations of VA loans still apply, which means that the eligible person will have an income limit that cannot be surpassed.
Jumbo Loans in California
California real estate is one of the most expensive in the country. With a median home price of over $800k, which is more than double that of the median national home, the regular conforming loan baseline limit of $548,250 is not enough for home buyers. Of California’s 58 counties, 10 of them use the maximum conforming loan limit of $822,375 for one-unit homes, and many more use limits greater than the 2021 baseline limit. The 10 most expensive counties according to the FHFA, which have the maximum conforming loan limit are:
- Alameda County
- Contra Costa County
- Los Angeles County
- Marin County
- Orange County
- San Benito County
- San Francisco County
- San Mateo County
- Santa Clara County
- Santa Cruz County
Unfortunately, these limits are still not enough for many home buyers as luxury homes are not the only ones that need jumbo loans. In Alameda County, the conforming loan limit is $822,375, but the median home value was $813,980 in April 2021. In many California counties, many home buyers have no choice but to use a jumbo loan.
Jumbo Loans in Texas
Texas is an upcoming real estate opportunity because of its growing employment in technology among other sectors and its raw population growth, which was the highest in the US in 2020. Among expensive property states, Texas is one of the more affordable states with a median home value of about $200,000. Most home buyers could get a comfortable home without exceeding the baseline conforming loan limit and having to get a jumbo loan. Every county within Texas has the baseline conforming loan limit for 2021 of $548,250.
If you do need a jumbo loan in Texas, there is no private mortgage insurance (PMI) to insure a mortgage with a down payment of less than 20%, so you will have to make a minimum down payment of 20%.
Jumbo Loans in Florida
Florida is a well-known real estate location for potential home buyers because of its real estate opportunities. For Florida’s growth potential, real estate is relatively cheap compared to urban states like California because of the large amount of land and low cost of living. The median home price of a Florida home is about $230,000, which is considerably below the baseline conforming loan limit, so most home buyers won’t have to use a Jumbo loan. Only one county in Florida does not have the baseline conforming loan limit of $548,250: Monroe County with a conforming loan limit of $608,350. Fortunately, most home listings within Monroe County are below this limit.
Florida offers jumbo loans of up to $2 million with minimum down payments of as low as 5% and they do not require private mortgage insurance (PMI). This could save you thousands in monthly insurance payments, but eligibility requirements may be stricter.
Jumbo Loans in New York
Falling slightly behind California, New York is another extremely expensive state for home buyers with a median home price of nearly $800k. With a baseline conforming loan limit of just $548,250, home buyers would be unable to get a conforming loan if there were not higher limits in certain counties. Of New York’s 62 counties, 10 of them have conforming loan limits of the maximum amount. These most expensive counties by property values according to the FHFA include:
- Bronx County
- Kings County
- Nassau County
- New York County
- Putnam County
- Queens County
- Richmond County
- Rockland County
- Suffolk County
- Westchester County
Only 2 other counties do not have the baseline conforming loan limit, but instead have limits of $726,525, which include:
- Dutchess County
- Orange County
However, with such expensive home prices, many home buyers will be stuck using a jumbo loan for a comfortable home purchase. The minimum down payment varies in New York, but in certain cases, you can get one for as low as 5% even though it is common to have a minimum down payment of 20%.
Latest News on Jumbo Loans
Recently, it has become harder to obtain a jumbo loan due to the Coronavirus pandemic. COVID-19 has resulted in a loss of jobs, savings, and affected the entire economy. As a result of which, jumbo loan lenders have to bear the full risk as they cannot sell the mortgages. Prior to the pandemic, jumbo mortgage lenders depended on investment firms and banks to buy mortgages and this would help reduce the risk for the lenders. However, the negative economic effects of the pandemic have resulted in a complete decline in the purchase of these loans by firms, making it difficult for mortgage lenders to hand out riskier jumbo loans to consumers.
Jumbo loans throughout the coronavirus pandemic have been full of ups and downs. During the initial height of the pandemic, many lenders either made stricter requirements for or canceled their jumbo loan programs. The negative impact on employment and savings severely affects the global economy with no exception to the US. Investment firms and banks who used to buy jumbo loans no longer could and mortgage lenders ended up having to bear the full risk of lending out jumbo loans to home buyers. Since investment firms and banks would no longer buy jumbo loans, conforming loans were the only viable option for lenders. Recently, the economy has been recovering, so investment firms and banks have started buying jumbo loans again. Many lenders have started re-offering jumbo loans to home buyers and softening their eligibility criteria. As the economy continues to recover, you can expect jumbo loans to become more widely available once again.
† While we try our best to get your the best rates, we cannot guarantee that they are always accurate. Casaplorer assumes no liability and provides no warranty for the accuracy of the information presented, and will not be held responsible for any damages resulting from its use. Rates shown are for informational purposes only and may differ by zipcode, county, and state. Estimated payments do not include taxes and insurance. Some state and county maximum loan amount restrictions may apply. Casaplorer is not endorsed or sponsored by any mortgage lender or government agency.