Jumbo Loan Program
What is a Jumbo Loan?
People looking to finance higher-end homes often need higher loan amounts. Loans that exceed conventional limits. For that, there are jumbo loans. Let’s look at this popular financing option, who it’s best for, and how it may work for you.
The Basics of Jumbo Loans
Commonly used to finance more expensive properties, jumbo loans exceed the loan limit set by the Federal Housing Finance Agency (FHFA). This FHFA limit is for loans guaranteed by Fannie Mae and Freddie Mac, the two major companies that buy mortgages. Loans that follow this FHFA limit are usually called conforming loans. Jumbo loans are non-conforming.
What are these FHFA limits? In most U.S. counties, the conforming limit for a one-unit property in 2024 is $766,550. That’s an increase of $40,350 from 2023. There are exceptions to this loan limit. In some areas along the California Coast, for example, the limit is $1,149,825 (150% of $766,550).
A higher loan amount usually increases the risk for mortgage professionals. Jumbo loans, therefore, can have higher interest rates and stricter approval criteria compared to other loan types.
What about jumbo loan terms? They’re similar to those for a conventional loan, with 30-year fixed rate, 5- and 7-year adjustable rates, and interest-only options. Property types share this similarity; with a jumbo loan, you can finance owner-occupied homes, second homes, and investment properties. These can be single-family houses, condos, one- to four-unit properties, and other types.
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What a jumbo loan is not…
Subprime. That dicey loan type triggered a mortgage crisis in the 2000s when unscrupulous lenders approved bad mortgages to the tune of billions. Today’s mortgage professionals must, by law, ensure jumbo loans are “qualified mortgages” as defined by Regulation Z of the federal Truth in Lending Act. In theory, only borrowers who can afford jumbo loans get approved for jumbo loans.
What are the requirements for a jumbo loan?
Credit score alone rarely determines approval; it’s one of several factors. However, credit score requirements for jumbo loans can be higher than requirements for other loan types. You often see jumbo loan approval with credit scores in the low 600s to the mid-700s. Borrowers with credit scores under 600 might not qualify for jumbo loans, but they might get approved for other loan types, such as FHA loans.
Foreclosures and past short sales may impact approval. Your debt-to-income ratio (DTI) usually plays a part. As with most mortgages, a DTI of under 36% favors qualification. However, up to 43% and higher is common with jumbo loan approval.
Cash in the bank can be a big plus; mortgage professionals are more likely to approve jumbo loans for borrowers with substantial liquid assets. This includes money for a down payment. Plus, having cash reserves to cover six to 12 months of mortgage payments is a good rule of thumb.
With most jumbo loan approvals, you’ll need to give the mortgage professional documentation that could include tax returns, 1099s, W-2s, and bank statements. A mortgage professional may also wish to see an appraisal of the home you’re looking to buy.
Who can benefit from a jumbo loan?
Borrowers who get approved for jumbo loans often share similar characteristics: low DTI, significant cash reserves, and reliable income. They commonly earn between $250,000 and $500,000 a year. In the finance world, these folks are sometimes referred to as HENRYs, which stands for High Earners, Not Rich Yet.
If you want a higher-cost home and don’t have enough savings for a cash sale, a jumbo loan may be your best option.
Location can influence the need for higher loan amounts. In California, for example, the value of an average home ($773,239 in 2024) tops the FHFA’s loan limit for many of the state’s counties. In Arizona, however, the average home value is $430,658, well within the conforming loan limit. In that state, you might consider other financing options, such as a conventional loan or a VA loan.
The Pros and Cons of Jumbo Loans
The Pros
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- Higher loan amount. If you want to live in a high-cost area, a jumbo loan could be your best (and maybe only) option to buy the home of your dreams.
- Flexibility. From property types to loan length and terms, almost any loan option you can get with a conforming loan, you can get with a jumbo loan.
- Streamlined. When buying a property that exceeds the FHFA limit, home buyers can seek multiple loans, such as piggyback loans. That usually means different sets of loan terms and multiple closing costs. Not so with a single jumbo loan.
The Cons
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- Cash on hand. Most mortgage professionals want borrowers to put at least 10% down, and some jumbo loans could require as much as 30% of the home’s purchase price. Add in reserves to cover up to a year of mortgage payments, and you’ll likely need to have considerable money in the bank.
- Taxes. Buying a more expensive home could mean you exceed the cap on mortgage interest deduction, thus limiting the tax benefit you might get with a lower-value conventional loan.
- Closing costs. The higher the loan amount, the higher some of the closing costs that are based on a percent of the loan’s total.
Perhaps Pro, Perhaps Con
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- Interest rate. If Fannie and Freddie won’t buy a loan, a mortgage professional may see this loan as riskier and charge a slightly higher interest rate. But that’s not always the case; for a period in 2022 and 2023, jumbos were more affordable than conforming loans. So, depending on the situation, the interest rate could go into the “pro” or “con” column.