Ideal for High-Cost Areas
Jumbo loans are a non-conforming loan option perfect for buyers looking in higher-priced locations or who have a more expansive homebuying budget.
Super-low interest rates
Loan amounts up to $3 million
Some 10% down payment options available
Mortgage Insurance (PMI) is not required
Minimum 10-20% down payment
Minimum credit score of 680
Must have at least 6 months of reserves
Stricter underwriting guidelines
What is a jumbo loan?
A jumbo loan is used to purchase higher-priced homes or larger properties with loan amounts that exceed the values set by the Federal Housing Finance Agency (FHFA) for conforming loans. Because these loans do not conform to the loan limits set out by the FHFA, they are not eligible for purchase by government-backed entities such as Fannie Mae and Freddie Mac. These loans are underwritten to individual investor guidelines, as these larger corporations can write stricter rules to fund these loans above the county’s loan limit.
The FHFA creates these loan limits to create stability in the marketplace and allow more of the population to access a mortgage. In 2022, the “low-balance” county loan limit is $647,200 and the “high-balance” limit for high-cost counties is $970,800. For loan amounts that exceed these thresholds, standard mortgage guidelines are removed and what is known as a “non-conforming” jumbo mortgage is required.
To offset the risk associated with these larger loan amounts, jumbo loans require higher credit scores, lower debt-to-income (DTI) thresholds, larger down payments, assets held in reserves, and stricter underwriting standards overall.
The role investors play in jumbo financing
Investors are entities (often other large banks, credit unions, or funds) that buy mortgages from mortgage banks right after they fund. At Homepad Lending, we have access to an extensive array of investors who will buy jumbo loans. Each of these jumbo investors has its own set of guidelines for things such as minimum credit score, liquid reserves held after closing, debt ratios, and down payment.
When we pre-approve jumbo loans, we “target” the investor with the best terms our clients will qualify for. Some of our investors have incredibly stringent guidelines but also have the lowest interest rates. Typically, investors with more lenient guidelines will have higher interest rates.
Lower Interest Rates
Because the guidelines for jumbo loans are far more stringent than conforming loans, interest rates tend to be significantly lower. The range varies depending on a variety of economic factors, but often jumbo rates are 1-2% lower than conforming rates.
Access to Higher Loan Amounts
Jumbo loans can allow you to reach loan amounts well above the conforming loan limits, which significantly expands your purchasing power.
Many Loan Options
We have access to over ten different jumbo investors, each with a different set of guidelines. This gives us the flexibility to match you with the best program for your scenario.
Stringent Qualification Guidelines
These loans can be very tricky to qualify for – you’ll need excellent credit, strong income, and plenty of assets. If you can’t meet all the requirements, you’ll need to keep your loan amount below the county loan limit.
Longer Closing Timeline
Underwriters assess all aspects of a jumbo loan with more scrutiny than a conventional or FHA loan, which can result in additional document requests. This, along with the more stringent appraisal standards, results in a longer closing timeline for jumbo loans versus conventional or FHA loans. Homepad Lending is still faster than almost everyone else on this front and can close jumbo loans in as fast as 17 days.
Higher Monthly Payment
With higher loan amounts comes a higher monthly payment. Even if you can qualify for a higher monthly payment, you’ll want to ensure this aligns with your budget. If keeping your monthly mortgage expense as low as possible is a high priority, a jumbo loan might not be the right fit for you.
What’s the difference between a jumbo loan and a conforming loan?
Obtaining a non-conforming mortgage requires more extensive documentation than a conforming loan, ranging from full tax returns, verified housing history, and additional requests for self-employed borrowers.
Additionally, jumbo loans have stricter appraisal standards that prevent us from using our panel of hand-picked appraisers in favor of investor-approved appraisers. These appraisals will have higher fees and take longer to complete due to the long list of requirements and larger size of the property. Jumbo investors often require a second review of an appraisal, known as a Collateral Desktop Analysis, or in some cases, a second full appraisal.
The longer appraisal timeline is one of the reasons that our fastest closing time for jumbo loans is 17-21 days, whereas we can shorten this to 12-14 days for conforming loans.
What’s the alternative?
If you’re unable to meet the stringent qualification guidelines associated with jumbo financing, combination financing may be an excellent alternative for you. This loan type allows us to sidestep many of the more difficult requirements of jumbo financing, such as a 20% down payment or showing reserve funds, making them an excellent alternative if you are looking at homes in a higher price range.
Combination financing consists of two loans – the first at the maximum conforming loan limit and a second loan to “bridge the gap” between your minimum 10.01% down payment and your purchase price. Underwriting guidelines for combination financing are much less stringent than they are for jumbo loans, but they will still require a minimum credit score of 680 and a maximum debt-to-income ratio of 45%.