What Is a Jumbo Loan? It’s Not as Huge as You Might Think


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At first glance, a jumbo loan seems self-explanatory: It’s a great, big loan, right? Essentially, that’s true. Obtaining a jumbo loan allows you to borrow a higher loan amount than the maximum value of a conforming loan. A conforming loan essentially “conforms” to guidelines set by Fannie Mae and Freddie Mac. A nonconforming loan does not—in this case, because it is larger than the limits for conforming loans. But just how much larger your loan limit may be when it is nonconforming depends on a couple of factors. Read on to learn the ins and outs of jumbo loans—and the requirements for getting approval for one so you can buy your new home.

What is a jumbo home loan?

Jumbo loans exceed the loan limit of conforming loans, which is $424,100 in most areas. If you live in a high-cost area, the conforming loan limit is $636,150. (Limits are allowed to be higher outside of the contiguous United States.)

“Fannie Mae and Freddie Mac use a county’s median household income to define what the conforming loan cutoff is for that particular area,” explains Richard Redmond, mortgage broker at All California Mortgage in Larkspur and author of “Mortgages: The Insider’s Guide.”

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But sometimes you need a higher loan amount for a high-priced real estate purchase, and that’s where jumbo loans come in. You can get a jumbo mortgage for a primary residence, vacation homes, or investment properties. It can also be a fixed-rate or adjustable-rate loan.

Credit requirements for a jumbo loan

Traditionally, borrowers will face more stringent credit qualifications when applying for an original or refinance jumbo mortgage, which typically require a minimum credit score of 700. (For a conforming loan, you’ll likely need a credit score of at least 620.) These are only benchmarks, though, since mortgage lenders set their own credit requirements, says Redmond.

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“There is no one-size-fits-all credit score for jumbo loans,” he adds.

Where to go for a jumbo mortgage

After the housing crisis, many mortgage lenders pulled out of the jumbo loan market. After all, jumbo loans pose a greater risk to the lender. Today, most jumbo-size original and refinance loans come from banks.

According to the Wall Street Journal, jumbo home loans rose to 24% of mortgage approvals at six of the largest U.S. retail banks in 2015, from 21% the year before, according to an analysis of federal home-loan data.

Those banks are JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, PNC Financial Services Group, and SunTrust Banks. So if you are planning on applying for a jumbo home loan, be sure to look at the rates these banks are offering.

Down payment requirements for a jumbo mortgage

The magic down payment figure for conventional loans is 20%, because it enables the borrower to avoid having to pay private mortgage insurance, or PMI.

Many jumbo-loan lenders require at least a 20% down payment—and some even require a 25% down payment. Moreover, PMI is not typically available on mortgages with higher loan limits.

Debt-to-income ratio requirements

Debt-to-income ratio, or DTI, is your total minimum monthly debt (add up your mortgage, insurance, taxes, and other debt payments you make in a month) divided by your gross monthly income. This ratio is used to determine whether you can afford to make your mortgage payments.

Maximum DTI for a conforming loan is usually 45%, compared with 38% for a loan in the jumbo range. Again, this is because lenders assume more risk when providing larger mortgage loans.

Interest rates

Before the housing market collapse in 2008, many conforming loans had lower interest rates than jumbo loans. That’s no longer the case, Redmond notes.

In fact, in recent years, interest rates on 30-year fixed-rate jumbo loans have slipped below rates for 30-year fixed-rate conforming loans. In the current housing market you can expect to pay similar interest rates.

Can you get a jumbo loan if you have a high loan-to-value ratio?

A loan-to-value ratio, or LTV, is essentially the amount of money you borrow from your lender, divided by the purchase price of the home, expressed as a percentage. Many home buyers believe that high loan-to-value jumbo loans are extinct when—in reality—they’re being offered by a number of mortgage lenders. Some even offer jumbo mortgages with up to 90% LTV.

For more smart financial news and advice, head over to MarketWatch.

Daniel Bortz has written for the New York Times, Washington Post, Money magazine, Consumer Reports, Entrepreneur magazine, and more. He is also a Realtor in Virginia.

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