Jumbo loans are a required, but lesser-known, option for financing homes that are above a certain price point. It’s no secret that the housing market is on the rebound. In some areas, prices are already well above their pre-recession levels.
And as more and more people become homeowners again, demand for mortgages is increasing. So if you’re thinking of buying a home in the near future, it’s important to know about the different types of mortgages that are available, including jumbo loans.
What Is a Jumbo Loan?
Also known as a non-conforming conventional loan, a jumbo loan is a mortgage that has a higher loan amount than what is considered conventional. In most parts of the country, anything above $647,200 (the maximum conforming loan threshold) is considered a jumbo loan.
But in some high-priced real estate markets, such as Los Angeles and New York City, the threshold is much higher. In those markets, anything above $1 million is considered a jumbo loan.
Jumbo loans are available in both fixed-rate and adjustable-rate mortgage (ARM) options. They can also be available in a variety of terms, such as 15 years or 30 years.
How Do They Work?
Jumbo loans work in much the same way as any other type of mortgage. You’ll work with a lender to determine how much you can borrow, based on factors like your income, debts, and the value of the home you’re buying.
Once you’re approved for a loan, you’ll make monthly payments to the lender. The amount you pay each month will include both principal (the amount you borrow) and interest (the cost of borrowing the money).
Over time, as you make your monthly payments, you’ll gradually pay off the loan until it’s paid in full.
What Are the Benefits?
There are a few key benefits of taking out a jumbo loan, including:
- You can finance a more expensive home: If you’re in the market for a high-end home, a jumbo loan may be your only option. Conventional loans have strict guidelines on the maximum price of a home they’ll finance, so if you’re looking at properties that are above that price point, a jumbo loan may be your best bet.
- You can get a lower interest rate: Because jumbo loans are not as common as conventional loans, they often come with a slightly higher interest rate. But if you have excellent credit (typically 700 or above) and a strong financial history, you may be able to qualify for a lower rate.
What Are the Drawbacks?
There are also a few potential drawbacks to taking out a jumbo loan, including:
- You’ll need a higher credit score: In order to qualify for a jumbo loan, you’ll likely need a higher credit score than if you were applying for a conventional mortgage. The exact number will vary from lender to lender, but you can expect to need a score of 700 or above.
- You’ll need a larger down payment: Jumbo loans typically require a larger down payment than conventional loans—often 20% or more. This means you may need to save up for longer in order to have enough money for a down payment.
- You may need to pay private mortgage insurance (PMI): If you’re not able to put down at least 20% of the loan amount, you may be required to pay PMI. This is an insurance policy that protects the lender if you default on your loan.
- You may have a harder time qualifying: Because jumbo loans are not as common, they can sometimes be more difficult to qualify for. Lenders may have stricter guidelines in terms of income, debt, and credit score. So if you’re thinking of applying for a jumbo loan, it’s important to do your research and make sure you understand the qualification requirements.
What Is the Process for Applying?
The process for applying for a jumbo loan is similar to the process for applying for any other type of mortgage. You’ll need to gather financial documents like tax returns and bank statements, and you’ll need to have a good idea of the home you want to buy.
Once you’ve done your research and gathered the necessary paperwork, you can start shopping around for a lender. Be sure to compare interest rates and fees, and ask about any special programs that might be available for jumbo loan borrowers.
When you’ve found a lender you’re comfortable with, you can begin the application process. The lender will likely ask for a variety of financial documents, so be prepared to provide things like tax returns, bank statements, and pay stubs.
Once you’ve submitted your application, the lender will review your financial history and decide whether or not to approve you for a loan. If you’re approved, you’ll then need to go through the process of shopping for a home and negotiating a purchase price.
How is Qualifying for a Jumbo Loan Different?
Qualifying for a jumbo loan is generally similar to qualifying for a conventional mortgage, but there are a few key differences. These differences include:
- A higher credit score, typically above 700
- A lower debt-to-income ratio, typically below 43%
- A larger down payment, typically 20% or more
- A strong financial history
- A second appraisal of the property may be necessary
These are just general guidelines, however, and each lender has its own unique qualifications. So it’s important to do your research and compare different lenders before applying for a loan.
As of 2022, jumbo loan limits are set by the federal government at $647,200 for a single-family home. If you’re looking to purchase a home in a high-cost area, however, you may be able to qualify for a higher loan limit. In certain areas of the country, the government sets higher limits for jumbo loans.
For example, in the Northeast and on the West Coast, loan limits are capped at $970,800, with a few exceptions in much smaller pockets of major US cities.
The Bottom Line
A jumbo loan is a mortgage that exceeds the loan limits set by the government. These loans are typically used to finance more expensive homes, and they come with a few key benefits—like the ability to get a lower interest rate—and a few potential drawbacks.
If you’re thinking of applying for a jumbo loan, it’s important to do your research and compare different lenders before you apply. You’ll also need to have a strong financial history and a good credit score in order to qualify.