Many people aspire to become homeowners and build equity in their residences. These people want to escape the continuous rent cycle and eventually stop making monthly payments. While an all-cash offer is out of most people’s budgets, financing makes home ownership more feasible. Most homeowners use a conventional mortgage to purchase their homes, but some expensive homes require jumbo mortgages for sufficient financing. We will discuss everything you need to know about a jumbo loan and how to get one.
What is a Jumbo Mortgage?
A jumbo mortgage is home financing for luxury properties. The FHFA limits how much capital you can borrow for a conventional loan. This limit currently sits at $766,550 in 2024, but it can change every year. The FHFA has larger limits in affluent counties since the average home price tends to be higher in those locations.
Jumbo Mortgages vs. Conventional Mortgages
A jumbo loan has several differences from a conventional mortgage that stretch beyond the type of house you can buy. You should consider these differences before getting financing for a jumbo loan.
Larger Down Payment
Jumbo loans have higher principals than conventional mortgages, which results in a higher down payment. However, the higher principal isn’t the only thing raising the down payment. Most jumbo loan borrowers must make a 20% down payment. Some exceptions exist, but if you want to finance a jumbo loan, save up for that minimum down payment.
You can make a 20% down payment for a conventional mortgage, but it’s not required. Some home buyers can make a 3%-3.5% down payment on a Freddie Mac or Fannie Mae loan. The smaller down payment will raise your monthly mortgage payments, but it makes homeownership feel more accessible.
Higher Interest Rates
Banks and financial institutions set interest rates based on how they perceive a borrower’s risk. A jumbo loan has a higher principal than a conventional mortgage, making them riskier assets for lenders. You can find jumbo loans with competitive rates, but you can end up with a higher interest rate. If you get stuck with the high rate, you can refinance your home in the future to secure a lower interest rate.
Higher Closing Costs and Fees
Some closing costs are based on a percentage of the loan’s principal. Therefore, a higher loan amount will result in higher closing costs. Borrowers also have to jump through more hurdles to obtain a jumbo loan, and those extra steps will result in more fees.
How Do You Qualify for a Jumbo Mortgage?
A jumbo mortgage helps you buy a larger house. While you can’t borrow more than $647,200 for most conventional mortgage loans, you can borrow more with a jumbo mortgage loan. Jumbo mortgages have more stringent requirements than conventional mortgages. Knowing what to expect will help you set goals and eventually get approved for your jumbo mortgage loan application.
Down Payment
Most jumbo loans will require a 20% down payment. However, some lenders will ask you to make a higher down payment to receive approval. You may get away with a 10% down payment in some circumstances but anticipate making the 20% down payment for a jumbo mortgage.
Credit Score
Lenders will require you to have a 700 credit score or higher to qualify for a jumbo loan, and some financial institutions set 720 as the minimum score. A higher credit score can entitle you to lower interest rates and a higher loan amount. These credit score requirements are higher than conventional and FHA mortgages. For example, a conventional mortgage requires a 620 credit score, while a borrower can obtain an FHA loan with a credit score as low as 500.
Income
Lenders will review your income to determine if you can reasonably afford the monthly jumbo mortgage payments. While a higher income puts you in better standing, your debt-to-income ratio plays a critical role in determining if you get approved for the loan.
Debt-to-income Ratio
Some people earn enough money to cover mortgage payments, but other financial obligations can get in the way. The debt-to-income ratio reveals if a borrower can keep up with the jumbo loan and other debt. Lenders have different degrees of leeway, but borrowers should have a debt-to-income ratio at or below 43%. Any debt-to-income ratio above that number will lead to a rejected application.
Cash Reserves
A lot of things can happen after you get a jumbo loan. Borrowers can lose their jobs, take on additional debt, and put themselves in financial trouble. A jumbo loan is a significant investment, and lenders want to make sure you can pay it. Cash reserves will strengthen your application, but some lenders will only accept your application if you have enough cash reserves to cover a year’s worth of jumbo loan payments.
Documentation
A financial institution will want to review several documents demonstrating your financial health. You should have tax returns, bank statements, W-2s and 1099s, investment account documents, and other resources ready.
Appraisals
Lenders do not want to overpay for a property. Some financial institutions will require a second appraisal of the property. This appraisal will increase your costs, but it can help you and the lender avoid overpaying. Banks will feel more confident giving you the necessary capital if the home is fairly valued.
Is a Jumbo Mortgage Right for You?
A jumbo mortgage enables you to buy a more expensive home. For some home buyers, a jumbo loan is their only choice. You can make a higher down payment on a conventional loan, so you don’t have to borrow as much money, but that’s not an option for everyone.
A jumbo loan will take up more space on your monthly budget, but most people use this for a personal residence or investment property. The loan application is also an important factor to assess when deciding if it’s right for you. Some people have no problem paying extra money for a better home, especially if it’s a forever home. Investors also have no problem with higher monthly payments if they believe they can generate a positive return from the property. A jumbo loan can help you pursue higher real estate investment cash flow or acquire your dream home. Conventional mortgages do not provide sufficient flexibility for every home buyer.
Ensure You are Getting the Right Mortgage Loan for You
A mortgage is a significant financial commitment that will stay on most people’s budgets for decades. Therefore, you should take your time when searching for houses and looking for the right loan. Doing your research and due diligence will help you make the best decision for your finances when the time comes.
