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What is a Jumbo Loan?

In the mortgage community, the term “jumbo loan” is used to describe a mortgage that exceeds the limit established by the Federal Housing Authority (FHA). These loans are different from conventional mortgages and special mortgages (such as VA loans) in several ways and cannot be guaranteed or securitized by Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac).

Jumbo loans are designed for homes that are more expensive, including luxury homes, large residential properties, and homes that are in areas with very high demand. Because these loans are structurally riskier than conventional mortgages, they are usually more difficult to apply for.

If you are considering applying for a jumbo loan, it is important to understand how these loans are structured and what makes them unique. Below, we will discuss the most important things homeowners need to know about jumbo loans.

Jumbo Loan Limits

The “cut off” for conforming loans is determined by the Federal Housing Finance Agency and changes every year. The 2020 limit for conforming loans—meaning loans that are supported by Fannie Mae and Freddie Mac—is $510,400. This represents a $26,050 increase from 2019 when the conforming mortgage cut off was $484,350.

The conforming loan limit is higher for areas with relatively high housing prices, high demand for housing, and high costs of living. Depending on where you live, the limit can be as high as $765,500. Currently, the New York, Washington DC, Los Angeles, San Francisco, Honolulu, and Jackson Hole (WY) metropolitan areas all have the highest limits available. Boston, San Diego, Sacramento, Baltimore, Denver, Nashville, Salt Lake City, Boise, and Seattle metros each have higher limits, as well.

The conforming loan limits for 2021 have not yet been announced, but it is likely that the cut off will once again be raised.

Jumbo Loan Rates

2020 was a historically low year for mortgage rates, in general, which has helped combat some of the economic issues introduced by the COVID-19 outbreak. With this being said, mortgage rates for both conforming and non-conforming (including jumbo loans) are constantly changing. The exact rate you pay will depend on several factors including your lender, your income, your credit score, the amount you hope to borrow, credit market conditions, and more.

Generally speaking, jumbo loans are riskier than conforming mortgages and, as a result, these loans almost always feature a higher interest rate. Recently, interest rates for jumbo loans will have an APR about one percent higher than conforming loans. So when conforming loans have an APR of 2-3 percent, as they have for much of this year, jumbo loan rates will be closer to 3-4 percent. The mortgage’s lifespan will also be relevant. As you will find with any type of loan, 15-year loans will carry less than 30-year loans, resulting in higher monthly payments but less total payment.

Special Considerations for a Jumbo Loan

Jumbo loans are inherently risky—they typically represent the largest amount a person will borrow in their lifetime—and qualifying for jumbo loans can be challenging. Contrary to conforming loans, lenders carry considerably more risk because if the loan defaults, their recourse is limited.

As a result, jumbo loans typically come with special considerations. Depending on your lender and various conditions attached to the loan, these considerations can include:

Higher Closing Costs:

Jumbo loans have much higher closing costs than conforming mortgages. While a typical mortgage will have a closing cost of around three percent, jumbo loan closing costs are usually closer to about six percent. If you are applying for a $500,000 loan, this means your closing costs may be as high as $30,000. In some cases, closing costs can be negotiated.

VA Funding Fee:

Beginning in 2020, the Veterans Association (VA) eliminated limits for home loans, which has since increased utilization of veteran lending programs. Veterans will still need to pay a one-time funding fee, which varies depending on the size of your down payment and whether you have used the program in the past before. If it is your first use and your down payment is ten percent or more, the funding fee will be 1.4 percent. On the other hand, if you’ve used the program before and you put less than 5 percent down, the funding fee becomes 3.6 percent.

Needed Cash Reserves:

Lenders want to avoid creating situations where their borrowers are “house poor”—they’ve made the down payment but have very little remaining money in the bank. When applying for a jumbo loan, this typically means having up to 18 months of expenses in cash or cash equivalents. The needed cash reserves can vary considerably by the lender however.

Underwritten Manually:

Jumbo loans are more complex and riskier than traditional mortgages, which is why you can count every jumbo loan you might apply for to be underwritten by hand. With a jumbo loan, there will be no such thing as an instant qualification.

Proof of Consistent Income:

Lenders will want to see proof of consistent income and may ask you to verify your employment status as late as closing day. If you are self-employed, you will typically need multiple years of consistent income before you’ll qualify for a mortgage. Additionally, since the COVID-19 outbreak, many lenders are now asking for multiple verification confirmations during the application process.

Good Credit Scores:

In all situations, having good credit will make it easier to qualify for loans and secure a desirable rate. While there are some exceptions, individuals applying for jumbo loans will typically need a credit score of at least 680. Scores above 720 will be even more desirable.

Can You Afford a Jumbo Mortgage?

Jumbo loans are loans that are beyond the limits set by the FHA for traditional, conforming mortgages. In most cases, the term “jumbo loan” can be applied to any mortgage valued at $510,400 or more (the limit is higher in HCOL areas). Typically, jumbo loans will have interest rates about one percent more expensive than conforming loans, which can add up over time.

These loans are not feasible for everyone, even if you can qualify for one. Still, if you are hoping to purchase a more expensive home and are able to satisfy these loans’ stricter considerations (higher interest rates, higher closing costs, higher credit minimums, etc.), then jumbo loans can be very appealing.

 

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This page last updated: March 21, 2022