What Is A Jumbo Loan And How Do You Get One?

Imagine discovering your dream home, the perfect oasis that fulfills all your desires and aspirations. However, there’s a catch – the price tag is a bit higher than expected. After communicating with your lender, you discover that the home price exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA).

This scenario is one in which a jumbo mortgage loan could be the ideal solution. It offers a financial avenue for those seeking to own high-value homes that surpass the confines of conforming loan limits. If you’re in a high-cost area or are looking at an exceedingly high home price in an average area, a jumbo loan can help you with your next purchase.

What Is A Jumbo Mortgage Loan?

A jumbo mortgage loan is a type of home loan that exceeds the conforming loan limits that the FHFA sets for borrowers in the housing market. These limits regulate the size of loans that government-sponsored entities like Fannie Mae and Freddie Mac can purchase, effectively capping the mortgage size available to aspiring homeowners.

Remember, mortgage lenders who make these loans usually sell them to Fannie Mae and Freddie Mac after origination. So, lenders obey these entities’ rules to ensure they can sell their loans.

However, jumbo loans can play by their own rules because they aren’t subject to governmental regulation. When private lenders offer these loans, they take the risk upon themselves instead of passing them on to the government to absorb. These loans cost slightly more than their conforming counterparts and lack the consumer protections conforming lenders must provide.

Jumbo loans are vital where housing prices soar above national averages. In these expensive regions, a conforming loan – the most common type of conventional home loan – won’t be big enough to cover the purchase price of even a modest home. For those purchases, borrowers will need a jumbo loan that disregards conventional standards. They surpass conforming loan limits and the typical requirements of mortgages, meaning borrowers must bring more to the table to qualify.

Because jumbo mortgage loans ignore the conforming limit, they’re known as non-conforming loans. As a result, they have different traits than conforming loans, including higher fees and strict qualification standards.

What Are Conforming Loan Limits?

Conforming loan limits determine how large of loans mortgage lenders provide to the average borrower. They cap out at a specific amount because Fannie Mae and Freddie Mac won’t purchase loans above the threshold, which is vital for banks to reduce the risk of lending and obtaining more lending capital.

The conforming loan limit for 2024 is $766,550 for most areas in the United States. For high-cost areas like Hawaii and Alaska, the limit for 2024 is $1,149,825.

Additionally, the limit adjusts every year based on the cost of living around the United States. This is to provide adequate funding for high-cost areas.

When Would You Need A Jumbo Home Loan?

A borrower would need a jumbo loan when buying a home that exceeds the conforming loan limit. Home prices can rise beyond the threshold for a variety of reasons, such as being in expensive areas, having an unusually high price in an average-cost area or being in an exceptional location like the Virgin Islands or Guam.

Say you can afford a luxury home in a suburb with mid- to high home prices. The home you’re interested in costs $850,000, which is $83,450 above the conforming loan limit. You’d need a jumbo home loan to purchase this house.

What Are Typical Jumbo Loan Requirements?

Here’s a breakdown of the different requirements for a jumbo loan versus a conventional loan across various key factors:

Debt-To-Income Ratio (DTI)

Conventional loans typically allow a DTI ratio up to 50%, while lower DTIs may result in more favorable terms and interest rates. On the other hand, jumbo loans typically allow a maximum DTI of 45%, although borrowers with 36% or lower may get better terms and rates.

Minimum Down Payment

Down payment requirements for conventional loans range from 3% to 5% for qualified borrowers. However, jumbo loans require larger down payments of at least 10%. Some lenders may require even higher down payments for exceptionally large loan amounts.

Loan-To-Value Ratio (LTV)

Because jumbo loans require a down payment of at least 10%, this leads to an initial loan-to-value (LTV) of 90% or lower. In other words, lenders won’t give a jumbo loan above 90% of the property value. This policy helps lower the risk in lending.

Proof Of Income

Lenders require proof of income for conventional and jumbo loans. A borrower’s income must be sufficient to cover their monthly debt obligations plus the new loan payment. While conventional loans require certain documents as proof of income, jumbo loans may require more documentation than a more traditional loan.

Cash Reserves

Conventional loans may require a few months’ worth of cash reserves, but the amount is generally more lenient for borrowers with credit scores above 660. Contrastingly, lenders require jumbo loan borrowers to have 6-12 months of income in reserve to qualify. This standard helps ensure borrowers can afford their loan payments and housing costs (including property taxes and insurance) in times of hardship.

Closing Costs

Closing costs for conventional loans can vary but are often between 3% to 6% of the purchase price. Jumbo loans have closing costs in the same range, but because the loan amounts are larger, the closing costs are higher. For example, a $900,000 mortgage loan could have closing costs between $27,000 and $54,000.

How Do You Apply For A Jumbo Loan?

Applying for a jumbo loan is similar to applying for a conventional loan. Specifically, you’ll need to shop around for a lender, get approval for a loan and submit an offer that a seller accepts.

Remember, lenders offer jumbo loans at their discretion. As a result, you may need to expand your search beyond the lender you’ve done business with in the past or your current bank. In addition, jumbo loan applications receive more scrutiny due to the higher loan amount.

As a result, you’ll need to supply ample evidence that you can afford the loan. Your income, cash reserves and down payment should be in place before applying to help ensure approval.

After a seller accepts your offer, your lender will require an appraisal of your desired property to verify that it’s worth a jumbo loan. This process helps the lender ensure they don’t give a loan that’s higher than the property value. It can also cause issues if the seller is asking for a higher price than the lender is willing to provide. You’ll have to renegotiate, walk away from the deal or come out of pocket for the difference.

Can You Buy A High-Value Home Without A Jumbo Loan?

If a borrower’s loan amount exceeds FHFA loan limits, they can try opting for a piggyback loan. This means taking out two mortgages at once to afford the home purchase. Usually, the second loan is for up to 10% of the home’s value financed as a home equity line of credit (HELOC). As a result, the first loan is 80% of the purchase price, and the borrower supplies the remaining 10% themselves as the down payment. 

Jumbo Loan FAQs

These frequently asked questions can help you cover your bases on jumbo loans.

What kinds of properties can I buy with a jumbo loan?

Jumbo loans are usually for primary residences, second homes, investment properties and land purchases. While a jumbo loan allows borrowers to purchase properties above the conforming loan limit, the lender can also limit the jumbo loan’s size at their discretion.  

Can I refinance my mortgage with a jumbo loan?

Borrowers can refinance with a jumbo loan if the refinance amount is over the conforming loan limit. Otherwise, the refinance would be for a conforming mortgage loan.

Does the VA offer jumbo mortgage loans?

The Department of Veterans Affairs (VA) offers VA jumbo loans for eligible active service people, veterans and their surviving spouses. If your Certificate of Eligibility (COE) indicates that you have full eligibility, you have access to a loan amount based on your income and DTI. Additionally, you’ll likely need a credit score of at least 680. 

Is it harder to get a jumbo loan?

Jumbo loans can be harder to qualify for because they have more stringent standards, such as requiring the borrower to have cash reserves of 6-12 months. However, these loans are becoming more widely available in response to rising home prices.

What is the minimum amount for a jumbo loan?

The minimum amount for a jumbo loan for 2024 is $766,550 for most areas. However, the minimum is $1,149,825 in high cost areas.

The Bottom Line

A jumbo mortgage loan is a financial tool that accommodates home purchases that surpass the conforming loan limits set by the FHFA. While conforming loans adhere to these limits and follow governmental regulations, jumbo loans operate outside those boundaries, allowing lenders to take on more risk without government backing.

Jumbo mortgages are essential for properties in high-cost areas or those exceeding average prices. These loans require larger down payments, lower LTVs and more rigorous income proof. Applying is similar to conventional loans, but scrutiny and requirements are higher.