A jumbo loan is a mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac. This limit is currently $417,000 for a single-family home. Some high-cost counties, including New York City and Los Angeles, have a limit of $625,000.
Interest rates tend to be competitive for jumbo loans, in some cases lower than rates offered for conforming loans.
Do I Qualify For A Jumbo Loan?
Borrowers must prove high income, excellent credit and make a large down payment to qualify for a jumbo loan.
- You must show high income as jumbo mortgages come with greater risk for the lender. Luxury properties are also more vulnerable to changes in the market.
- You must have a low debt-to-income ratio to comfortably pay the PITI (principal, interest, taxes and insurance). In general, your mortgage payment should not exceed 38% of your gross income.
- A credit score of at least 720 is required for a jumbo mortgage, and lenders typically pull credit reports from all three credit bureaus to make sure all information is reported. Some top jumbo lenders require that the average credit score approved is 760.
- It is possible to get a jumbo loan with 20% down, but many lenders want at least a 30% down payment.
- Not all properties qualify, and many lenders will not offer a jumbo loan on an investment property or vacation home.
Due to the Dodd-Frank Act, jumbo loans go through more scrutiny than they did in the past. This bill requires mortgages meet certain terms to be considered a Qualified Mortgage. A jumbo loan with a smaller payment but a large balloon payment at the end of the term, are not qualified; nor are interest-only jumbo loans. That means these jumbo loan options are much harder to find, but jumbo loans as a whole are safer for consumers.
Most jumbo loans are adjustable-rate mortgages (ARMs), and fixed-rate jumbo mortgages are hard to come by. This is because banks typically keep jumbo loans on their books, as they cannot sell them to Fannie Mae or Freddie Mac. Banks use their customers' deposits to pay for the loans. Because interest rates on deposits are very low now, banks can make a good profit on jumbo loans even when they offer borrowers a low mortgage rate. Still, deposit rates will rise someday soon, so banks feel more comfortable offering jumbo ARMs.
Super Jumbo Loans And Conforming Jumbo Loans
Some jumbo loans are also referred to as Super Jumbo Loans, which refers to loans above $650,000, possibly reaching $20 million or more.
New legislation has also created something known as a conforming jumbo loan, which ranges between $417,001 and $625,500 for a conventional loan, and $417,001 to $729,750 for an FHA loan.
Some borrowers may wish to avoid a jumbo loan by breaking up a home loan into a first mortgage and a second mortgage. In this case, make sure your combined rate is cheaper than the rate you would have received with a jumbo loan.