If you’re in a scenario where your financials and credit score are high, and you’re ready to build your dream home in a desirable location, the jumbo construction loan might be for you.
Jumbo construction loans may help offer solutions for borrowers looking to build a home in high-cost areas.
You may use a jumbo construction loan to build your primary home, build a vacation or investment property, or purchase a new home and make major renovations or upgrades.
We’ll review what a jumbo construction loan is, the requirements, and the process you can expect.
Basics of a Jumbo Construction Loan
Borrowers may get a jumbo construction loan to pay for the construction or renovation work of a new home, including materials, labor, permits, and other related expenses.
These loans differ from conforming loans as they do not adhere to the conforming loan limits set by the Federal Housing Financing Agency (FHFA)—which, as of 2023, is up to $726,200 depending on location.
If you’re hoping to build in an area where you’d need a home loan that exceeds that limit, then you’ll need to qualify for a jumbo loan.
Types of jumbo construction loans
- Construction-to-permanent allows borrowers to convert their construction loan into their primary home loan when construction is finished. Some lenders may offer interest-only monthly payments during the construction phase. These loans may save borrowers money and time as there is only one application process and round of closing costs. When construction is complete, the construction loan will convert into a mortgage loan, and monthly payments will begin.
- Construction-only loans cover the necessary costs of home construction and that’s it. This means that once construction is finished, you’ll owe the principal balance on the loan. Borrowers can either pay this balance out of pocket or take out a mortgage for permanent financing.
- Renovation loans are for borrowers planning to purchase and upgrade, add to, or remodel a home. Renovation loans work similarly to construction-to-permanent as they typically convert into your primary mortgage loan once the project is finished.
Jumbo construction loan requirements
You may typically expect the following requirements with a jumbo construction loan:
- Credit score of at least 700
- The home must be your primary residence (for a set amount of time)
- Debt-to-income ratio hovering at 43% or higher
- Down payment of at least 20%
Additionally, lenders may ask for reserve funds or contingency reserves in the event of unexpected costs occurring either during construction or closing. With the higher loan limits in a jumbo construction loan, up to a year’s worth of monthly payments may be necessary.
Your lender may also require you to work with approved contractors to ensure their qualifications and financial stability.
Most federally backed construction loans, such as the Federal Housing Administration (FHA) or United States Department of Agriculture (USDA) construction loans, may require borrowers to meet additional requirements and adhere to set loan limitations.
These loan programs may alter building plans but may also provide opportunities to save money on your down payment and monthly mortgage payments. You may also expect more flexible credit scores and income requirements.
One exception is that the Department of Veterans of Affairs (VA) doesn’t typically set loan limitations— this means borrowers may receive the opportunity of lower down payments and flexible requirements while still building the home of their dreams.
Work with a lender experienced in jumbo construction loans so they can review your building plans and asses your financials to determine which loan product meets your needs.
Jumbo construction loan process
Like any home loan, there’s a process to go through to secure a loan. The jumbo construction loan process works similarly to conforming construction loans and federally backed loans.
You may possibly expect the following:
- Review and determine your project and budget
- Assess your income and financial portfolio
- Research and choose a lender
- Obtain prequalification or a preapproval
- Find a builder or contractor
- Design your project plans
- Apply for a jumbo construction loan
- Underwriting
- Approval or denial
- If approved, close on your loan
- Construction and disbursement begins
- Construction is finalized, and monthly loan payments begin
The process of a jumbo construction loan may vary for everyone and the steps aren’t always sequential—you might already have a builder or contractor or have a preapproval for a jumbo construction loan.
However, for the most streamlined experience, take the necessary actions to prepare yourself and work with the right lender.
Qualify for a jumbo construction loan with The Federal Savings Bank
So, how can you prepare yourself for a significant loan like a jumbo construction loan?
Develop a good understanding of your budget and building plans. You may want to meet with a builder to get a better scope of what your project entails.
Ensure you understand the timeline and don’t be afraid to ask questions. You want to work with someone with the experience and equipment to complete your project.
Meet with a qualifying lender to obtain a pre-approval. A pre-approval gives borrowers peace of mind that there shouldn’t be any obstacles within the approval process. It also shows contractors that you’re a credible partner.
Make sure to provide your lender with the required documentation and information, such as your estimated budget, credit score, down payment information, and goals.
Whether you’re seeking a jumbo, conforming, or federally-backed construction loan —The Federal Savings Bank is here to help.
Our mission is that we strive to provide home loans with a seamless application process and homebuying journey for all, no matter where you are in the process or your situation.
Apply with The Federal Savings Bank today to learn how we may help you reach your homeownership goals.
Subject to credit approval. Terms and conditions may apply. Subject to VA eligibility requirements. Property insurance is required on all loans secured by property.
Down payment assistance requirements are based on the mortgage insurer or guarantor’s guidelines. Borrower may fund down payment and closing costs. Down Payment Assistance Program, which assist eligible homebuyers with purchasing a home. Down payment assistance programs are not eligible for all potential homebuyers.
This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For more information on financial planning or investment advice, consult a registered investment advisor or financial planner. For tax advice, please consult a tax professional.
This information is intended for educational purposes only. Products and interest rates subject to change without notice. Loan products are subject to credit approval and include terms and conditions, fees and other costs. Terms and conditions may apply. Property insurance is required on all loans secured by property. VA loan products are subject to VA eligibility requirements. Adjustable Rate Mortgage (ARM) interest rates and monthly payment are subject to adjustment. Upon submission of a full application, a mortgage banker will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to you individual situation.
