What is a Jumbo Loan, and What Should You Know About Them?

If you are thinking about buying a home, particularly if you are a high-income-earner or if you live in an area with a high cost of living (HCOL), you may have heard that your peers needed to take out a “jumbo loan.” Indeed, for many consumers jumbo loans can be an attractive home loan option. But what is a Jumbo loan? What are some of the requirements for a Jumbo home loan? Read on to learn more.

So What is a Jumbo Loan?

Every year, the Federal Housing and Finance Agency (FHFA) issues their “for each county in the United States. These limits are not a hard cap on the amount of money one can borrow– rather, they represent the maximum loan amount that Fannie Mae and Freddie Mac will purchase from originating home lenders. A loan for a dollar amount below the home loan limit might also be described as a “conforming” loan.

The federal (OCC) states, “[l]ending limits protect the safety and soundness of national banks, promote diversification of loans, and help ensure equitable access to banking services. These limits prevent excessive loans to one person, or loans to related persons who are financially dependent.”

What does that mean for jumbo loans? A jumbo loan is just a loan for more money than the conforming loan limit. In other words, according to the writers at Nerdwallet^®, “Jumbo loans work the same way as any other mortgage — there’s just more money involved.” You and your loan officer will still discuss the terms of your home loan, and you should be provided with a loan estimate in a timely manner. This document should break down your monthly payments in addition to providing a picture of the closing costs associated with the loan.

When Does it Make Sense to Get a Jumbo Loan?

Broadly, you may be interested in taking out a jumbo home loan if other home loan options don’t meet your needs. There are a couple scenarios where it might make sense for you to take out a jumbo home loan in place of a conforming home loan. Consider the following example cases:

1. Paul and Lupita want to purchase a single-family home in a high-cost-of-living (HCOL) area like San Francisco or New York City. Depending on the size of their down payment, they might seek out a jumbo loan when they identify a property listed for more than the loan limits announced by the FHFA that year.
2. Jamie and Ben are high earners who want to purchase a home to match their lifestyle. If that home will cost more than the loan limits set by Fannie and Freddie, they might apply for a jumbo purchase mortgage, depending on how much they put down up front.
3. Sarah wants to her home loan in order to obtain an interest rate that she prefers. If the outstanding balance on her existing loan is higher than the conforming loan limit, she might opt for a jumbo loan instead.
4. Adam purchased a home in a HCOL area many years ago, and now he wants to “cash out” some of his equity to send his daughter to college. Depending on the new appraised value of the home, and the amount of cash Adam wants access to, he might seek out a jumbo loan.

There are other scenarios where it might make sense to search for a jumbo home loan. Many lenders offer jumbo home construction loans, for example, to consumers who want to build high-value homes, or homes in markets with a high cost of living.

What are the Jumbo Loan Requirements?

Your loan officer should be able to answer any questions you have about your personal eligibility for a jumbo loan. Jumbo loans typically function like non-jumbo loans, so some of the requirements may seem familiar if you have applied for a home loan before. Here are some of the things you might need for when it comes time for the lender to underwrite a jumbo loan:

1. Income requirements. Lenders will want to see that you make enough money to pay back your jumbo loan. Depending on how you are compensated, your lender may ask to see paystubs, W-2s, or tax returns for yourself or your business.
2. Debt/credit requirements. Nerdwallet^® says, “As with any home loan, a stronger credit score is likely to be beneficial” to a jumbo loan applicant. Some lenders may have stricter credit score requirements on jumbo loans than on their conforming loan offerings.
3. Your lender may also have debt-to-income requirements that must be met before they will offer you a jumbo loan, meaning that if you have too much existing monthly debt, you may not be able to take out a jumbo loan. Some consumers address this by paying down credit cards, auto loans, or other debt from savings.
4. Assets to close. Nerdwallet^® also says, “You’re more likely to be approved for a jumbo loan if you have ample cash in the bank. It’s not uncommon for lenders to ask jumbo loan borrowers to show they have enough cash reserves to cover up to one year of mortgage payments” or at least to cover the costs of closing your home loan.
5. Your lender may require you to pay for the cost of an appraisal of your home, so that they can determine its value.

Remember that a jumbo loan may represent more risk to a lender than many of the other home loans they offer. For this reason, depending on the lending institution, lending requirements may be stricter for jumbo loans than they are for non-jumbo loans.

Summary

According to Bankrate^®, “a jumbo loan covers a larger-than-normal loan amount. More specifically, a jumbo loan is any mortgage that exceeds an area’s conforming loan limits.” If you are curious about whether a jumbo loan could finance your next home purchase, consult with a loan officer, or check at FannieMae.com. Remember that jumbo loans sometimes come with stricter requirements than other mortgages.

Down payment assistance, which assists eligible homebuyers with purchasing a home, is subject to requirements and guidelines of the mortgage insurer or guarantor. Borrower may fund down payment and closing costs. Down payment assistance programs are not eligible for all potential homebuyers.