What is a jumbo loan?

Jumbo loans vs. conforming loans

Conventional loans have limits according to the guidelines of the Federal Housing Finance Agency (FHFA). Loans that conform to these guidelines are called Conforming Conventional Loans and those that don’t are known as Non-Conforming Conventional loans. Jumbo Loans are Non-Conforming Conventional loans that exceed the guidelines for the amounts, set by the FHFA.

Conforming conventional loans are backed by Government Sponsored Enterprises (GSE), which are pseudo companies created by congress. The two main GSE are the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Since Jumbo loans are Non-Conforming, they are not backed by the GSE.

 

Property Types

When you take out a mortgage loan that is sponsored by a government office like the VA loan, USDA loan, or FHA loan, there will be very strict guidelines set about what properties can be purchased with the loans. Most government-sponsored mortgage programs require that you only use the loan amount for the purchase of a primary residence. They might also require you to be a first-time homebuyer. With Jumbo loans, this is not the case, since these are Non-Conforming loans they don’t place any strict requirements on you about the number of properties you own or why you are purchasing the property. Additionally, there is also no limit to the types of properties that you can own under a Jumbo loan. You could use it to purchase a primary residence, vacation house, or new additions to your real estate portfolio.

>>More: First Time Home Buyer Mistakes and How to Avoid Them

California Rules

When applying for Jumbo loans you will be required to have some requirements which are the same as other loans such as your proof of income and proof of residence. However, other requirements such as your credit score, the stability of income, employment history, Debt to Income Ratio, etc will be under heavy scrutiny. On top of this, you will be facing some extra fees due to additional services such as a second appraisal and manual underwriting process.

How Does a Jumbo Loan Work?

Credit score

The credit score requirements for Jumbo loans are usually very high since the loan amount is also high. The higher the amount the more risk to the lender and for the same reason lenders have a higher requirement for qualification. Usually, the credit score requirement for a Jumbo loan will range from 680 to 740. The higher the amount for your jumbo loan the higher the credit score you will need to qualify for that jumbo loan. If you are already a homeowner then you will need a higher credit score, between 720 and 740.

Cash reserves   

Jumbo loans, like all loans, require regular monthly payments. However, because of the large sums allocated to Jumbo loans, they do have some additional requirements before you can be approved for the mortgage. To qualify for a Jumbo loan, you need to show that you are financially stable enough to make the payments. For this, you have to show the amount of 12-18 months’ worth of the payments in your bank account. The good news is that you don’t necessarily need to have this amount saved specifically for the Jumbo loan, you just need to show that you have the sums available in your account, so it is possible to use a retirement savings account or gift funds.

Documentation

Jumbo loans also have more elaborate requirements for documentation. They are considered attractive to people with multiple sources of income and accordingly, you will have to provide more paperwork and documentation than you would for a conventional loan. The exact requirements of documentation may depend on the loan amount too. Lenders will often ask for two years’ worth of tax filings as opposed to one year to meet the verification of income requirements.

Appraisals

Lenders are not allowed to loan amounts more than the property is worth and you don’t want to pay more for the property either. This is where appraisals for mortgages come in. Owing to the high amounts of Jumbo loans the property appraisals require more scrutiny and if your loan amount is high enough then you might also require two property appraisals before the closing. During appraisals, the appraiser has two main jobs. They will evaluate the value of the property and also check the property to make sure it meets health and safety standards. Any additional utilities or amenities included in the property purchase will also be reviewed and influence the value assigned to the property.

Bigger down payment

Jumbo loans usually require a downpayment of 20%. However, the good news is that the down payment requirement varies by lenders. Some lenders might have a down payment requirement of 10% or even 15%. Very rarely, but some lenders can require a 30% down payment on the Jumbo loan. It is also possible that a lender might offer a down payment option of as low as 5%, but it is important to remember that the lender still requires to be confident that you can make the payments so Jumbo loans with low down payment requirements might also include higher interest rates.

Potentially higher interest rates

With Jumbo loans, it is important to check out multiple lenders before making a decision because the offers available could vary quite a bit. This is especially true for the interest rates applicable on the jumbo loan. Usually, most lenders will offer interest rates that are comparable to the conforming conventional loans or perhaps even lower to attract borrowers. However, the interest rates offered on a Jumbo loan depend on the lender and the market conditions of the time. It is a good rule of thumb to look at the interest rates on the conforming conventional loans to get an idea about the interest rates on the Jumbo loans.

What Are The Jumbo Conforming Loan Limits for 2021?

Find local conforming loan limits

The rules and limits for Jumbo loans vary by several factors. The maximum amount for Jumbo loans depends on the number of members in the household, the region, the state, and the year. Every year, on an annual basis the Federal Housing Finance Agency (FHFA) announces the max limit for all loan types, including the Jumbo loans. The Jumbo loan limit for California for a single-family property in 2021 was $548,250, which is a $37,850 increase from 2020. The loan limit for high-cost areas in 2021 is $822,375.

Are Jumbo Loan Rates Higher?

The interest rates on loans depend on multiple factors but the period of the loan and the type of interest rate play important roles. You can get loans for a period of 15 years and 30 years. You can find interest rates of two types, Fixed Interest Rates, and Variable Interest Rates. The benefit of shorter terms is that the loan can be paid off early and they usually have lower interest rates. Fixed Interest Rates have the benefit of being constant while Variable Interest Rates have fixed rates for the first 5 years and then have adjustable rates in the remaining years. For 2021 the average mortgage rate for a 30-year Fixed Interest Rate Jumbo loan is 3.01% and 2.43% for a 15 year Fixed Interest rate Jumbo loan.

How do you qualify for a Jumbo Loan?

Special Considerations for Jumbo Mortgages

Jumbo loan requirements being higher include the stringent checking of your documentations, additional paperwork, higher Debt to Income Ratios, higher closing costs, extra submissions of income documentation, and manual underwriting process.

Debt-To-Income Ratio (DTI)

Your Debt to Income Ratio or DTI is your ratio of income to your monthly debts. Lenders use the Debt to Income Ratio to gauge a borrower’s ability to repay a loan. To calculate the ratio all you need to do is divide your monthly payments or debts by your monthly income before taxes. Jumbo loans having strict requirements so the DTI ratio required to qualify is usually between 38% and 43%, the exact requirement will differ by lender.

Typical Loan Requirements

Other typical loan requirements for Jumbo loans are very similar to traditional loans. You will be required to provide proof of residence which can be done by providing utility bills. The best thing about Jumbo loans is that they don’t usually require Private Mortgage Insurance or PMI. This is especially the case due to the 20% down payment.

1. Closing Costs Are Higher

Since Jumbo loans are for very high amounts, the closing costs are also high. Another reason for high closing costs is that they require additional appraisals. The closing costs of a Jumbo loan can range between 3% to 6% of your total home value. For a conventional loan, you would be paying closing costs of 2% to 5%.

2. Consistent Income

Jumbo loans require very consistent payments. You will need to show that you can complete all your monthly payments and are making an appropriate income that will allow you to complete the repayment of your loan. For proof of income, you can provide pay-stubs of the last 2 years and you must also have been under the same employer for 2 years. There is also no limit to your incomes, just like in the case for most traditional loans. You might also be required to submit paperwork proving that your income will not change (decrease) for the next 2 years.

3. Manual Underwriting

Underwriting is a process that requires research and assessing the risk associated with a borrower. Lenders use underwriting to gauge whether a borrower will be able to repay the loan and this is done by assigning the task to a financial institution and submitting your documentation and records to assess the amount of risk you bring to the lender, usually, this process is automated. For Jumbo loans the process of underwriting is done manually, meaning that the financial expert will personally go through all your credit reports, tax filings, proof of income, etc to find anything about you that could potentially be a cause for your disqualification from the Jumbo loan.

Summary

The Bottom Line

Jumbo loans are special loans that don’t conform to the conventional loan guidelines set by the Federal Housing Finance Agency (FHFA) or the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). They are geared towards high-income earners whose finances are very strong. Jumbo loans are perfect if you are looking to buy expensive properties in high-cost areas like in some parts of California. These loans also don’t require Private Mortgage Insurance (PMI) as government-sponsored programs do but for that same reason, they carry higher risk. The amounts for the Jumbo loan change on an annual basis and depend on the latest economic trends. The rate can vary by type of household, members in a household, the region, etc. The 2021 rates for the Jumbo loan have been announced by the FHFA at $548,250, which is an increase of over $30,000 compared to the previous year.

Jumbo loans can be used to purchase multiple kinds of properties and don’t even require your property to be the first time you are buying a home. Unlike many loans, Jumbo loans do not require you to be a first-time homebuyer. Not all lenders, however, will offer loans for all types of property. Some might only extend Jumbo loans for primary residences while others for vacation homes. A great thing about Jumbo loans is that the interest rates can be very low to promote them compared to conventional loan types. The interest rates also vary by lender so it is an advisable practice to check with multiple lenders before applying for a loan.

The requirements for Jumbo loans are much stricter due to the amount for the loans. The down payment is usually 20% but it can also be as low as 5% or 10%, this will vary by lender. In addition to down payments, Jumbo loans require high Debt to Income Ratios between 36% to 40%. The credit score requirements are also higher than those of conventional loans, they depend on the amount but can be as high as requiring FICO scores of 740. Special requirements for Jumbo loans include cash reserves covering the first 12 months of payments, two appraisals for the property, and a manual underwriting process. It is due to these additional requirements that the closing costs of Jumbo loans are also high.

Mission Pacific Mortgage is a mortgage company located near Carlsbad, California, and is your best option for Jumbo Loans.

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