If you’re looking to purchase a home in a pricier neighborhood, you may find that you can’t get a loan large enough to purchase your dream house. Don’t worry, you still have options. Conforming loans are generally sold to Fannie Mae and Freddie Mac, which means that they must adhere to the limits and requirements set by these government-sponsored enterprises. Jumbo loans, on the other hand, are not, and can be obtained through private lenders.
Jumbo loans may be a good option for you if you need a larger loan than the local limit for conforming loans and don’t have the cash flow to put down a larger down payment. An added benefit of this mortgage option is that there’s no mortgage insurance requirement. However, because this loan may come at a higher risk to the lender, it typically has slightly stricter qualification requirements than typical conforming loans that possess lower limits.
If a conforming loan just won’t cut it, read this article to gain a clearer understanding of jumbo loans, their qualification requirements and rates. With this information in hand, you’ll be able to determine if a jumbo loan is right for you and can enter the mortgage process, knowing that you’ve made an informed decision.
What Is A Jumbo Loan?
A jumbo loan (or jumbo mortgage) is a type of financing where the loan amount is higher than the conforming loan limits set by the Federal Housing Finance Agency (FHFA). The 2020 loan limit on conforming loans is $510,400 in most areas and $765,600 in high-cost areas. For borrowers interested in purchasing more expensive properties, jumbo loans are a valuable alternative.
Jumbo Loan Requirements And Limits
What you need to qualify for this loan will depend on what type of jumbo loan you’re getting and the amount you need to borrow. There are a few loan types we’ll go over:
- Home purchase
- Rate or term refinance
- Cash-out refinance
- Investment property purchase or refinance
- Land purchase
Jumbo Loan On A Home Purchase
If you’re buying a one-unit primary property with a loan amount of up to $1.5 million, you’ll need to have a minimum median FICO® Score of 720 and a minimum down payment of 10%. If you’re a first-time home buyer, the minimum down payment for a jumbo loan is 15%. If the property exceeds 20 acres, the minimum down payment is 20%. The maximum debt-to-income ratio – which compares your minimum monthly installment and revolving debt payments to monthly income – must be no higher than 40%. Finally, if you have a down payment of 20% or more, you can get a jumbo loan with a DTI of 43% and a median FICO®Score of 680 or better.
If the primary residence has more than one unit or the loan amount is higher than $1.5 million, you’ll have slightly different credit score requirements, and you’ll need to make a higher down payment – up to 40%, depending on the loan amount and type of occupancy. You’ll also need to have a 43% DTI or lower.
Rate Or Term Refinance On A Jumbo Loan
If you plan on doing a rate or term refinance on a jumbo loan, you’ll need to have a minimum FICO® Score of 680 and a maximum DTI of 43%. The amount of equity you’re required to have in the home to refinance will depend on the loan amount. For a loan amount of up to $1.5 million, you must have at least 20% equity in your home. For loan amounts up to $3 million, you’ll need to have more equity in the home (up to 40%).
Jumbo Loan Cash-Out Refinance Requirements
If you have a primary, one-unit property, you can take cash out with a jumbo loan refinance. However, there are limits to how much cash you can take out, depending on how much equity you have in your home. These limits are as follows:
- If you have less than 40% equity in your home, you can take out up to $350,000.
- If you have between 40% and 50% equity in your home, you can take out up to $500,000.
- If you have 50% or more equity in your home, you can take out up to $750,000.
Whatever the amount of cash you take out in your refinance, you must leave a certain amount of equity in the home. For loan amounts up to $1 million, you must leave a minimum of 20% equity in the home. You can take cash out on loan amounts up to $2 million, but you’ll need to leave more equity in the home (up to 30%).
Jumbo Loan On An Investment Property
If you’re looking to purchase or do a rate-term refinance on an investment property, you can do so with a jumbo loan. Here are the details:
- The property must be one or two units.
- You need to have a 40% down payment or equity stake in the property.
- The loan amount can be up to $1 million.
- Your DTI should be no greater than 43% with a minimum median FICO® Score of 760 or better.
Jumbo Loan On The Purchase Of Land
Whether you’re purchasing or refinancing, you may use a jumbo loan for a home on up to 40 acres of land. However, there are certain requirements you should be aware of if you’re getting a property with more than 20 acres of land.
First, your down payment or equity amount must be 10% more than it would be for properties with 20 acres or fewer. For example, if you were purchasing a one-unit primary jumbo property with a loan amount of $1 million or less, your down payment would have to be 20% instead of 10%.
Second, the appraiser must be able to find at least two comparable properties in the area with land amounts that are no less than 5 acres below the acreage you’re financing. That means, if you were getting a mortgage on a home with 35 acres, two comparable homes would have to be found with at least 30 acres of land.
Also, the value of the land itself cannot make up more than 35% of the overall appraised value of the land and the home.
For the sake of convenient math, let’s say you were financing a home with an overall appraised value of $1 million. No more than $350,000 of that appraised value can be based on the value of the site itself.
Finally, the land can’t be zoned for agricultural use.
Jumbo Loan Rates
Because there’s greater risk involved in lending large amounts of money, jumbo loans typically carry higher interest rates than conforming loans. However, jumbo loan rates can vary dramatically, depending on your lender, finances and down payment.
When mortgages are viewed as involving less risk, lenders may choose to offer rates that are in-line or even lower than conforming loan rates. The extreme variation in jumbo loan rates makes it even more important to shop around before choosing a specific lender as each will offer different loan terms.
VA Jumbo Loans
Veterans or active members of the U.S. military can qualify for VA jumbo loans if they’re interested in purchasing homes that exceed the standard loan limits of their area. However, the requirements for VA jumbo loans are a bit more restrictive than they are for typical VA loans.
For VA loans, borrowers need to have a minimum FICO® Score of 620, but they don’t need a down payment. This is not the case for VA jumbo loans. To qualify for these higher loans, borrowers must have a minimum score of 640 and may need to make a down payment.
If you don't want to make a down payment on a VA jumbo loan, the median credit score necessary is 740. A 680 median FICO® Score will allow you to make a 5% down payment. With a 640 median FICO®, the down payment is 10%. It's important to note that other lenders may have different policies.
If you have an impacted entitlement, meaning you have a partial entitlement but not the full amount, different down payment guidelines apply. We suggest speaking with a Home Loan Expert.
Is A Jumbo Loan Right For You?
If you’re trying to determine whether a jumbo loan is right for you, you should first consider whether you truly need one. Remember, the conforming loan limit is $510,400 – and up to $765,600 in high-cost areas, like California, New York and Hawaii. If the property you’re interested in exceeds the limit for your area, you should see if making a higher down payment will make up for the difference.
Assuming that you still require a higher loan amount, you must next consider your financials. Jumbo loans come with higher monthly payments. If you feel you can afford to make these higher payments comfortably, just make sure that you have a high credit score and low DTI.
A Jumbo loan can be the solution you need to pay for that perfect home. If you’re ready to get started, create an account with Rocket Mortgage®, so you can learn more about your options. And to go over your options in detail, feel free to speak with one of our Home Loan Experts at (800) 785-4788.