How to know when a jumbo mortgage loan is the right choice

Each year, federally backed home mortgage companies Fannie Mae and Freddie Mac set limits on the loans they will purchase or guarantee. Loans that fall within these limits are “conforming loans” and loans that exceed these limits are “non-conforming” or “jumbo loans.”

To put it simply, a jumbo mortgage is used to finance properties too costly for a conforming loan to cover. The maximum amount for a conforming loan in 2021 is $548,250 in most counties, while more expensive parts of the country like Alaska, Hawaii, Guam, and the US Virgin Islands see this limit increased to $822,375. If the home you’re eyeing exceeds the conforming loan limit in your area, you may require a jumbo loan.

Jumbo loans vs conventional loans

While conventional mortgages are typically offered by private lenders such as banks, credit unions, and mortgage companies, not all lenders offer jumbo loans.

Both types of financing require homeowners to meet certain eligibility requirements like minimum credit score, income thresholds, and minimum down payments, but since jumbo loans are considered riskier for lenders, eligibility requirements tend to be more challenging to meet.

Interest rates on a jumbo loan are typically available with either a fixed or adjustable interest rate, and unsurprisingly are usually higher than interest rates on a conventional home loan—but not as high as one might think. The interest rate difference between conforming and nonconforming loans range from roughly 0.25% to 1%.

Do you qualify for a jumbo loan?

In addition to the stricter qualifying requirements associated with jumbo loans, Covid-19 has made jumbo mortgages even harder to come by, with many lenders imposing lower jumbo loan limits, and even more stringent requirements than usual. Baseline requirements include:

  • Credit score: Lenders might require your FICO score to be over 700, and sometimes as high as 720.
  • Debt-to-income ratio: Your debt-to-income ratio (DTI) should be 43% or less to qualify for a conventional mortgage; for a jumbo loan lenders typically look for an even lower DTI.
  • Cash reserves: The more cash you have in the bank, the more likely you are to be approved for a jumbo loan. Your lender may request proof that you have enough cash reserves to cover a year’s worth of mortgage payments.
  • Documentation: You’ll be asked for extensive documentation in the form of tax returns, W-2s, and 1099s, in addition to bank statements and information on investment accounts.
  • Appraisals: Some lenders offering jumbo loans may require a second home appraisal for the property you’re planning on buying.
  • Down payment: On jumbo mortgages, lenders are looking for down payments of at least 15% to 30%, as compared to the 3% minimum on conventional loans.

Do you need a jumbo loan?

The first step in determining whether you need a jumbo loan is identifying the conforming loan limits in your area. If your anticipated price range falls outside these limits, you might be a candidate.

Jumbo loans are not meant to extend one’s borrowing limits. Rather, their intended use is to help financially secure buyers invest in homes that cost more than the average. If you meet the above-listed criteria, you might use a jumbo loan to buy a primary residence, investment property, or vacation home.

To find the right type of loan for your purposes, start by talking to a qualified mortgage broker!