What is a Jumbo Mortgage Loan and What are the Limits?

Mortgages that exceed the conforming loan limit are called jumbo loans. These loans usually do not meet the requirements to be purchased by Fannie Mae or Freddie Mac and are funded directly by lenders to borrowers.

Jumbo mortgages can help you purchase high-end luxury homes or multifamily residences with more than four units.

Because the jumbo loan limit is an insanely large amount of money, jumbo mortgages have stricter guidelines and require more documentation than conforming loans.

Jumbo mortgages are riskier for lenders because of the higher amount borrowed.

In many cases, borrowers with these types of home loans have lower credit scores and make larger down payments to get approval for financing since the lender will incur greater risk if the borrower defaults on their payments and property value decline.

What is the difference between a conventional loan and a jumbo loan?

The main difference between a conventional home loan and a jumbo loan is different limits on how much money you can borrow.

A conventional loan is insured by Fannie Mae or Freddie Mac and purchased by investors on the secondary mortgage market.

However, a jumbo loan exceeds the conforming limits of Fannie Mae or Freddie Mac.

Jumbo Loan Limit USA

The high-end limits are based on the average cost of a home in your area, and pay special attention to places where real estate prices are rising rapidly.

The conforming loan limit can be as low as $647,200 or as high as $970,800, depending on the median home prices in your area. So, you can expect your jumbo loan to be higher than that amount.

In areas where housing costs are higher, the upper limit for a conforming loan will be higher.

Who Needs a Jumbo Mortgage Loan?

Individuals that need larger loans to finance their homes use jumbo mortgage loans.

There is no maximum jumbo loan limit on how much you can borrow using this mortgage product. That's for the bank to decide based on your needs and overall financial wellness.

Below are answers to the question - Who should apply for a jumbo loan?

High-net-worth individuals

Jumbo loans aren't for everyone. This is because jumbo loans are mortgages with loan amounts above the conforming limits set by government-sponsored entities (GSEs) such as Fannie Mae and Freddie Mac. Because of that, they have stricter requirements.

The average amount a borrower can expect to pay on a jumbo mortgage is around 0.25% to 0.5% higher than what they would pay on a conforming loan, so it may not be worth it depending on the size of the mortgage and length of time you plan to spend in your home.

If you're going to take out a jumbo loan, you should consider these factors:

What are your down payment options?

If you don't have 20% to put down toward your home purchase price, your lender will most likely require private mortgage insurance (PMI).

PMI protects lenders if you default on payments, but it's also an extra cost for borrowers who need help coming up with their down payment funds.

If you can put 20% down or more, PMI won't be necessary, and you'll save money in the long run.

Interest rates

Jumbo loan interest rates are usually higher than conventional loans—typically around 0.5% more. The higher the jumbo loan limit, the higher the interest.

These loans have a lower chance of being sold on the secondary market, and lenders compensate for this risk by charging a higher interest rate.

Qualifying for the loan

You'll need to meet specific debt-to-income ratio and credit standards to qualify for a jumbo loan, even with a substantial down payment and good income.

Homebuyers' in expensive real estate markets

Consider a jumbo loan if you're looking to take out a loan to purchase an expensive property. You will likely have to meet some requirements to qualify, including having a high credit score and a large down payment.

Jumbo loans are ideal for people who are purchasing homes in expensive real estate markets or borrowing money to buy luxury vacation homes or investment properties.

Homeowners who want a large loan may consider a jumbo loan if you:

• want to make a 20% or larger down payment on your home

• are refinancing your mortgage

• want to consolidate other debts, such as paying off a car loan or credit card debt

• are purchasing a second home and plan to use the first home as collateral

If you fall into one of these categories but don't have perfect credit, you may still qualify for a jumbo loan with the help of a co-signer who does.

In addition, some lenders set different requirements according to how much you're borrowing.

For example, they could require borrowers who take out loans totaling $1 million or more to have higher credit scores than those applying for lower amounts.

Finally, you might be able to qualify by having significant assets and cash savings and investments.

More Money Bigger Homes - How to Qualify & Get Approved for a Jumbo Mortgage Loan

The qualification requirements for a jumbo mortgage loan are often stricter than conventional mortgages because they pose a greater risk to lenders.

Two factors that determine whether or not an individual can qualify for a jumbo mortgage loan are their credit score and debt to income ratio (DTI).

In general, here are the requirements for getting a jumbo mortgage loan:

Interest Rates on Jumbo Mortgages

Jumbo loans typically have higher interest rates than conventional loans, increasing your monthly payment. Interest rates on jumbo loans are usually lower than non-conventional (non-government) loan products, making these loans more attractive to borrowers who have to get a jumbo loan.

Interest rates on jumbo mortgages can vary widely between lenders. The different rates you'll see will also depend on the type of mortgage you choose, whether a 15-year or 30-year fixed-rate mortgage.

Fixed-rate mortgages have the same interest rate for the entire loan term, 3 percent. Variable-rate mortgages start with a low introductory rate and adjust upwards or downwards based on an index such as the prime interest rate.

How Do I Get Accepted for a Jumbo Loan?

Qualifying for a jumbo loan—which is what it sounds like, a very large loan—requires that you fulfill the same basic requirements as any other mortgage loan.

This means you will need to have a good credit history, stable income, and sufficient funds to cover your down payment and closing costs. In addition, you will also need to meet the following criteria:

Your debt-to-income ratio should not exceed 43%. The higher your DTI is, the more likely it is that you won't be able to make your monthly payments, as you'll have too many other debts competing for your paycheck.

If you choose a fixed-rate mortgage rather than an adjustable-rate (ARM), your loan-to-value (LTV) ratio should be 80% or less.

The LTV ratio compares how much money you owe on your home with how much it's worth; if yours exceeds 80%, then lenders consider this high risk because if something were to happen and they had to foreclose on the house, there would be little equity left for them after all was said and done.

Down Payment on a Jumbo Mortgage

How much money you'll need for your down payment will depend on the loan-to-value (LTV) ratio of the mortgage you obtain.

If your home is valued at $850,000 and you want a $950,000 mortgage, your LTV would be 89%. The higher the LTV percentage, the higher the interest rate. If you have more money to put down, your LTV will be lower and less money will be needed upfront.

Let's look at some examples of how this works. We're looking at buying our dream house that appraises for $1 million with a 20% down payment (an $800k mortgage). We've saved up $200k in cash for our down payment, so our LTV would be 80%.

On the other hand, we wanted to buy an investment property with an appraisal value of $2 million. We only have enough cash set aside for a 10% (or lesser) down payment—in this case. It would be exactly 10 % or $200k—so our LTV would come out to 90 %.

Credit Score Requirements on Jumbo Loans

The short answer is that the minimum credit score required will differ by lender. Some lenders may require higher minimum credit scores (for example, 680 or above), while others may issue a jumbo loan with a minimum credit score in the 600s.

Jumbo loans are riskier because they exceed the limits set by Fannie Mae and Freddie Mac, so you'll need to demonstrate better creditworthiness for approval.

So, if you're seeking a jumbo loan, your lender will probably want to see a high credit score (typically 700-720 or higher).

What Is the Debt-to-Income Ratio on a Jumbo Mortgage?

A debt-to-income ratio is an approach for lenders to determine if you are eligible for a mortgage. The debt-to-income ratio tells the lender how much of your income is going toward any existing debts and what part of your income remains for your mortgage.

The DTI is split into two parts - the front and back end. The front end refers to the housing costs, and the back end refers to all other monthly debts (credit cards, car loans).

How Lenders Calculate Debt to Income Ratio

When applying for a Jumbo mortgage loan, most lenders will look at two different DTI ratios: Back End & Front-End DTI Ratios.

Typically, lenders do not like DTIs above 36%, but this can vary depending on other factors such as credit history & asset reserves.

We recommend speaking with experienced Loan Officers today.

Jumbo Loan Limit - Can I Get Approved for a Higher Amount Than I Need?

Nope. Unfortunately, you can't increase the amount of your jumbo loan to keep a bit more cash in your pocket.

You'll be approved for exactly what you need and nothing more. This is one of only a handful of situations where you don't want to get approved for more than you need!

If the house appraisal comes back higher than what you agreed with the seller, well, then there's good news! But that's not something that lenders will do for you.

Private Mortgage Insurance (PMI) on a Jumbo Mortgage Loan

Private mortgage insurance protects lenders against default on your loan, though you can get it canceled when you have 20 percent equity in the home.

The cost of this protection can be steep—$1,500 to $2,000 per year— but it's worth it for buyers with small down payments. It costs about 1 percent of the total amount you owe each month.

How much is PMI for jumbo loans?

If you have a conventional mortgage but only put down 10% or less, you'll have to pay private mortgage insurance (PMI) until your loan-to-value (LTV) ratio drops to 80%.

Once you reach 80% LTV, your lender is obligated to cancel PMI on the date when your principal balance is scheduled to reach 78%.

Unfortunately, it's not quite as simple for jumbo loans. There is no industry standard for PMI rates on jumbo loans, so you will likely pay more than a conventional loan.

According to the Mortgage Bankers Association, the average annual PMI rate for single-family homes in 2016 was 0.54%.

That breaks down to about $4 for every $100 of monthly payment value. On a $750,000 home loan with a 5% down payment (i.e., an LTV of 95%), this would come out to about $308 per month in additional premium payments.

That's more than double the average PMI rate that borrowers paid on conventional loans — just 0.22%.

What Happens if You Default on Your Jumbo Mortgage Payment?

You've seen that little flyer in the mail a few times, offering you a teaser rate of 3.99% on your mortgage payment. You're unsure how to use it because it's in tiny print and doesn't make sense.

So, you put it in the recycling bin, but then you lose track of it. (Who doesn't lose track of something that small?) Then one day, nearly a month later, you open your mailbox, and there's a letter from your bank saying that you've failed to make four payments.

Your credit score is already low. The bank will start sending notices if more payments are late—but does this mean that now that all of your payments are past due, the bank can legally foreclose?

Is it possible for them to take your home away from you? Or worse - What happens if you default on the loan entirely?

Bad things happen when you default on your jumbo loan, but first, let's look at some numbers. Later, we'll show you how to avoid defaulting.

Statistics on loan defaults during COVID

• By April 2020, the default rate for all loans was 2.8 %, up from 1.8% in December 2019.

• In June 2020, the overall loan default rate rose to 3%.

If you are concerned about missing a payment on your loan or mortgage, contact your lender as soon as possible to sort out a solution that works for you and your lender together.

The Consequences of Defaulting on Your Jumbo Mortgage

• You will lose your home.

• You will owe the lender more money.

• Your credit rating will be negatively impacted, making it harder to get a loan in the future. It might also be challenging to obtain employment if your potential employer checks your credit report before hiring you.

• Stress and depression may result from losing a significant asset, not being able to pay off the debt, and hurting your credit history.

• Lenders may place liens on any of your other properties so that they can recover their funds from you if possible - which means that those properties could be foreclosed upon as well!

Ways to Avoid Defaulting on Your Jumbo Mortgage?

You can do several things to avoid defaulting on your jumbo mortgage payment.

You should always prioritize paying your bills before using your money to buy things that are not necessities. Here are five ways that you can avoid defaulting on your jumbo mortgage:

• Pay more than the minimum required payment.
• Make extra payments whenever you can.
• Get a home equity line of credit.
• Sell your home or rent it out.

Finding Help with Your Loan Payment - Solutions that Work

And when the above options seem too daunting, there are even more options. Here are some common solutions to help you find money to pay your mortgage.

Modify your loan

If you qualify for a modification, contact your lender as soon as possible (at least 30 days before a modification is due).

You'll have to meet specific criteria, but it's usually worth the effort if you do and patiently waits out the process. And be sure to save copies of any pertinent paperwork from your lender and loan servicer.

Even if you can't make a payment on time, it's always better to have documentation of your attempts at reaching out than to have no proof.

Refinance

It sounds counterintuitive, but refinancing your jumbo loan with a new lender is easier than making a lump sum payment or selling your house.

In addition to getting interest rates lower than what you're paying now, refinancing reduces the amount of principal (money) owed overtime because you're paying off the original loan balance each month instead of making payments on a new balance each month until the remaining principal is paid off entirely.

Most banks offer refinancing options simultaneously with their jumbo loans – just check around for the terms and rates that work best in your situation.

Payment-in-full

If all else fails and your only option for keeping up with payments is making a payment in full or selling property, put it toward extra cash flow so that nothing stops you from making timely payments in the future until something changes—do so!

Some lenders prefer this solution over foreclosure because they get paid out immediately instead of taking their cut once something is sold or lost through foreclosure.

But don't bite off more than you can chew

We suggest getting advice before doing this since this solution has consequences beyond dealing with future missed mortgage payments and potential reductions in home equity insurance coverage, should anything happen along the way.

Jumbo loans can be complex, and if you default on them, the consequences can be dire.

Alternatives to Jumbo Loans

Because of their size, jumbo loans are considered riskier investments for lenders.

The money that backs jumbo loans is typically not from banks or government institutions such as Fannie Mae and Freddie Mac but rather from private firms who want to invest in real estate.

As a result, interest rates for jumbo loans are slightly higher (roughly 0.25 percent) than conforming rates. You have options if you're looking to buy a home with a jumbo mortgage. Here are some suggestions:

Asking the seller to pay closing costs

Negotiate with the seller to cover all or part of the closing costs when you make an offer. The more cash you put down and the more you pay upfront, the less they will have to cover.

Borrow only what you need

Refinance your mortgage when you have paid off enough of your loan to fall below the jumbo threshold, at which point you can refinance into a conventional loan at a lower payment rate.

You can also refinance an adjustable-rate mortgage into a fixed-rate loan for greater payment stability.

Take a slightly different approach

Think about buying a multifamily or two-family home.

You can live in one unit and rent out the other. The mortgage will be based on the income from both units, making it easier to qualify for the loan. If there is any damage to the property while you're living there, your renter's insurance will cover it.

Talk to your parents

If your parents have the means and are willing to help out, you might be able to qualify for a jumbo loan if they co-sign on the mortgage with you.

They might also make it possible for you to get into a more affordable jumbo loan than you could otherwise get.

Another option is for your parents to give you money toward the down payment so that your loan amount isn't quite so large and makes it easier to qualify.

Move to an affordable city

You don't have to live where you work — why not move to a cheaper area, buy a home with a conventional loan and rent it out?

You could even rent out your current home and use the proceeds as additional income for qualification purposes.

Jumbo Loans Limit Trends

Jumbo loan limits by the state tend to be higher in areas with high median home values because lenders can spread their risk over a larger number of less-expensive homes.

The mortgage industry uses two measures for setting the conforming loan limits that determine whether you have a conventional or jumbo loan. These measures are the baseline and ceiling for each county.

The baseline loan limit is based on the median home value in counties considered low-cost housing markets, while the ceiling is based on the highest-cost housing markets.

Jumbo loan limits have increased significantly in the last few years, making it easier for borrowers to get into jumbo loans.

If you need a jumbo loan, you should know the pros and cons

It's essential to evaluate the pros and cons of a jumbo loan before you apply for one.

Jumbo loans require a larger down payment with stricter credit requirements than conventional mortgages. And it may be harder to refinance if you're underwater on your mortgage (meaning, owe more than it's worth).

The upfront paperwork can also be overwhelming, as many jumbo lenders require extensive tax returns, bank statements, and standard application materials.

You'll need lots of paperwork, even if you're not self-employed or don't have many assets, because the lender will want to verify that you have enough cash on hand for repairs, new furniture, and closing costs — just in case.

This is where jumbo loans are different from conforming loans: they're riskier for lenders since they generally cannot be resold as easily as conforming loans can once they close.

Like any other type of loan, jumbo loans must be underwritten according to strict guidelines. Lenders must pay close attention to their lending portfolios and ensure that their borrowers are creditworthy.

They also need to follow prudent lending practices, especially when issuing jumbo loans (because of the increased risk associated with a larger loan amount).

Given this additional scrutiny and more careful underwriting on the part of lenders, many experts argue that jumbo loans are safer than smaller conforming loans. And indeed, jumbo loans have not been at the center of any mortgage crisis in recent years.

But given their small market share relative to overall mortgages, there is no actual proof that they are either more or less safe than conforming loans.

Jumbo loan Pros

Jumbo mortgages are available for primary residences, second or vacation homes, and investment properties and are also available in various terms, including fixed-rate and adjustable-rate loans.

You can buy a home in an expensive market

Jumbo loans are available for primary residences, vacation homes, and investment properties.

However, if you're looking to buy your first home, you may still qualify for any number of government-backed, low-down-payment loans with more generous credit requirements.

You can avoid paying for two mortgages

A jumbo loan might be the best option if you want to refinance your current mortgage into a lower interest rate and you don't want to pay the fees associated with two mortgages.

Jumbo rates are competitive with conforming loans

The rates on jumbo mortgages fluctuate and may be higher or lower than the conforming mortgage rate.

Many homebuyers have opted for jumbo mortgages because they offer more favorable terms than many conforming loans available today.

The loans are as safe as conforming loans

Like any other type of loan, jumbo loans must be underwritten according to strict guidelines. Lenders must pay close attention to their lending portfolios and ensure that their borrowers are creditworthy.

They also need to follow prudent lending practices, especially when issuing jumbo loans (because of the increased risk associated with a larger loan amount).

Given this additional scrutiny and more careful underwriting on the part of lenders, many experts argue that jumbo loans are safer than smaller conforming loans.

And indeed, jumbo loans have not been at the center of any mortgage crisis in recent years.

Jumbo loan Cons

Higher credit score

Most lenders require a higher minimum credit score than conforming loans, typically between 650 and 700, depending on the lender, to get approved for a jumbo loan.

The higher the credit score, the better terms and interest rate you will likely receive.

However, if your credit score isn't quite at 680 or above, there's still hope: Some lenders will approve jumbo mortgage applications with borrowers whose lower scores are offset by their strong financial position and low DTI.

Jumbo loans are known for requiring large down payments

Down payments on these loans are typically higher than a conventional loan. The loan amount is more considerable, and the lender assumes a more significant risk by lending such a large sum of money.

A jumbo mortgage may also require you to pay additional costs at closing, including private mortgage insurance (PMI) of up to 2 %, which may be necessary if your credit score is less than 680.

You can expect to put anywhere between 15 % and 30 % down on a jumbo loan, but there are ways to reduce the size of this initial payment.

You may be able to use a home equity line of credit (HELOC) or other property as collateral to reduce the size of this down payment.

Interest rates are higher

One of the downsides of a jumbo loan is that interest rates are usually higher than conforming loans.

This is because jumbo loans are considered riskier; they tend to have lower liquidity if you need to sell your home, so lenders charge more for them since they're less likely to get their money back.

How much higher you can expect the interest rate on your jumbo loan will depend on the size of your loan and your credit history. Nonetheless, the rates have been getting cheaper over the years.

Jumbo Loan Market Trends

Rates are dropping

If you can afford the higher monthly payments on a jumbo mortgage, the interest rate spread between jumbo mortgages and conforming loans has been shrinking.

That's great news for homeowners who want to refinance and take advantage of lower rates but want to pull cash out — as long as they have enough equity to qualify for a jumbo mortgage.

According to Bankrate's weekly survey of large banks and thrifts, the interest rate for 30-year conforming mortgages was 4.14 % as of March 9, 2022, compared to 3.83 % for jumbo loans for the same loan term.

The gap between the two averaged 0.31 percentage points over the past five years. However, that difference has been shrinking recently because jumbo mortgage interest rates dropped faster than those on conforming loans early this year.

Jumbo Loans Demand is Rising

Jumbo loans originations grew by 11 % between 2019 and 2020. Homebuyers in some states which require jumbo loans financed an average of $1 million.

With mortgage rates historically low, some buyers opt for jumbo loans when they see their dream house is out of reach.

Even though there's still a lot of uncertainty about what the housing market will look like this year, one thing is for sure - It's a great time to be a borrower.

Limits are Getting Bigger

The most considerable demand for bigger jumbo mortgages is higher than the national average in areas where home prices are higher.

That's certainly the case in some parts of California and Florida, where high-priced homes are driving up the cost of borrowing.

One notable post COVID trend is that jumbo loans are getting bigger, which means you might be able to borrow more to buy a higher-priced home. Most cities will now have higher jumbo loan limits, given that conforming limits have risen to $647,200.

Jumbo loans for more significant amounts of money are becoming an increasingly important option for would-be home buyers or refinancers.

This is especially true in high-cost areas like the coasts and large metropolitan areas.

Final Thoughts

For sure, jumbo loans aren't going away anytime soon.

As long as the demand for bigger-ticket property remains strong and interest rates stay low, this market will likely continue its growth in the years to come.