If you’re thinking of buying a larger home or a home in a high-priced area, the saying, “go big or go home” can take on a literal meaning when trying to secure financing. That’s because it often takes more than the typical mortgage to make your home purchase work.
That’s where jumbo mortgages often come into play. Jumbo loans are very similar to typical mortgages in some ways, but there are some key distinctions to be aware of if you need this type of financing.
Jumbo Loan Basics
A jumbo loan is exactly what it sounds like—a larger-than-average mortgage. But what’s considered “average?”
While mortgages come in all shapes and colors, roughly half of mortgages originated in the U.S. are conforming loans. They’re called that because they “conform” to certain guidelines and loan limits set by the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac. These government-sponsored entities are the largest purchasers of mortgages in the country.
As of 2023, the conforming loan limit is $726,200 in most U.S. counties, but the limit can be higher in markets with above-average home prices, like San Francisco or New York. If you need to borrow more than this limit, you’ll most likely need a jumbo loan—which, by definition, is a non-conforming loan. But there are other things that make jumbo loans unique.
How They’re Different
Because jumbo loans are larger than most mortgages, lenders view them as a bit riskier. Since you’re borrowing more money, your lender is taking on more risk if you’re unable to make your payments. For this reason, you’ll typically need a very good credit score and other strong financial characteristics to qualify. (More about that later.)
The higher level of risk is also why jumbo loans generally have higher interest rates than conforming loans. In most cases, however, jumbo loan rates are competitive with conforming rates, so this shouldn’t deter you if you need this type of financing.
However, jumbo loans do require a larger down payment than other types of loans. For instance, borrowers who meet certain qualifications can get a conforming loan with a down payment as low as 3%, while those who qualify for the FHA’s first-time homebuyer program need only 3.5%. Jumbo loans, on the other hand, typically require a down payment of 20% or more.
Closing costs and fees are often higher for jumbo loans, too. Every mortgage includes certain costs, such as an origination fee, document fees, title fees, and so on. Because there are extra steps to getting approved for a jumbo loan, you can expect to pay additional costs, as well.
How to Qualify
So, how does one get a jumbo loan? The requirements vary from lender to lender, but having a credit score over 700 is a good start. Having great credit tells your lender that you’re on top of your financial obligations.
Another important factor is your debt-to-income ratio (DTI), which is the percentage of debt you have compared to your income. Normally, a DTI of 36% will get you in the ballpark, although a higher DTI may work if you have offsetting factors, such as substantial savings.
When you apply for a jumbo loan, you’ll need to provide considerable details about your finances. In addition to the usual documents, like tax returns, pay stubs, and W-2 or 1099 forms, you’ll be asked to provide proof of your assets to show the lender that you can cover your debts. This can include cash savings, stocks and bonds, retirement funds, business assets, or other properties you own.
If the home you’re thinking of buying is in the jumbo loan territory, Right By You Mortgage can help. We have several jumbo loan programs available with 10-, 15-, and 30-year fixed rate options. You can also finance up to 80% of your home’s purchase price, which can be super helpful if you’re trying not to drain your savings to buy a home.
Ready to make that dream home a reality? Our local loan experts at Right By You Mortgage are ready to assist you! Find a loan officer near you or email us at firstname.lastname@example.org to get started.