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What is a Jumbo Loan and What Are Its Limits?

TLDR

What You Need To Know

  • Jumbo mortgage loans exceed the conforming loan limit of $647,200
  • Interest rates are usually higher for jumbo loans than for conforming loans
  • You'll need a ton of income and a solid credit score and credit history to qualify for a jumbo loan

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A jumbo loan is exactly what it sounds like – it’s much bigger than the average mortgage loan. These massive loans are often used to purchase homes and investment properties that exceed the Federal Housing Finance Agency’s (FHFAs) conforming loan limit (CLL).

For 2022, the conforming loan limit is $647,200. In Hawaii, Alaska and some other federally designated high-cost markets, the 2022 conforming loan limit is set at $970,800.[1] So, if you need a mortgage for more than that, you need to apply for a jumbo loan.

While the hoops and fees may seem intimidating at first, we’re here to walk you through the steps of getting a jumbo loan. This includes limits and types of jumbo loans, qualifying criteria and other important tips or considerations when you’re shopping around for a jumbo loan.

How a Jumbo Loan Works

Jumbo loans function similarly to conventional or conforming mortgage loans, but their dollar amount exceeds the amounts Fannie Mae or Freddie Mac will back. A conforming loan is a mortgage that doesn’t exceed the annual dollar limit set by the FHFA. Any mortgage loan that exceeds that amount is a jumbo loan.

Because jumbo loans aren’t eligible to be purchased or guaranteed by Fannie Mae or Freddie Mac, they tend to be a higher risk to lenders than conventional loans. The application process and terms are similar for both types of loans, but credit and down payment requirements for jumbo loans are generally higher.

Jumbo loans typically have higher interest rates than conforming loans, but their payment schedules, fixed or variable rate availability and other terms are usually similar to conforming loans. The main benefit of jumbo loans is that they don’t come with the same restrictions as conforming loans, allowing home buyers to buy in highly competitive markets.

Jumbo Loan Limits, Explained

While jumbo loan limits are determined by individual lenders, the baseline of what qualifies as a jumbo loan is set by the FHFA.

The FHFA conforming loan limit for mortgages eligible to be backed by Fannie Mae or Freddie Mac in 2022 is $647,200. That’s up $98,950 from $548,250 in 2021.[1]

This national limit is adjusted each year to proportionally reflect inflation or other changes in average U.S. home prices. For example, because average house prices increased by 18.05%, the national CLL also increased by 18.05%.[1]

While the CLL provides a national baseline, some geographical areas may have exceptions. In cases where the local median home value is higher than the baseline CLL, the area’s loan limit can be up to 150% higher than the baseline, which amounts to $970,800 for 2022. This is common in high-cost areas, such as Hawaii, New York City, Los Angeles and most of Alaska.

Types of Jumbo Loans

There are several types of jumbo loans out there: primary, cash-out refinance and nonprimary. Each one is designed to fulfill different needs, and their requirements are pretty much the same.

I’m …This means I’m probably best suited with a(n) …Depending on …
Buying a 1-unit primary property with a loan amount of up to $2 millionPrimary home purchase jumbo loan• 680+ credit score
• 10.01%+ down payment (up to 25% more for a greater unit and loan amount)
• 45% or less debt-to-income (DTI) ratio
Refinancing and need to pull cash out of my equity beyond conforming loan limitsCash-out refinance jumbo loanThe same requirements as primary residences, plus equity in the home
Buying or refinancing nonprimary propertiesInvestment properties jumbo mortgageThe same requirement as primary residences

How To Qualify for a Jumbo Loan

Qualifying for a jumbo loan is similar to qualifying a conforming loan – but with stricter requirements. To qualify for a jumbo loan, you’ll need to present a solid financial profile with a high credit score, a low debt-to-income (DTI) ratio and an adequate income.

An ideal credit score

Lenders expect at least a 700 FICO® Score for a jumbo loan but prefer the higher side of 720.

A high credit score shows lenders that you’re a reliable borrower who can be trusted to make on-time loan payments. The higher your score, the higher your lender’s confidence will be in your ability to repay the loan.

A low debt-to-income (DTI) ratio

As savvier finance enthusiasts know, DTI measures your monthly recurring debt against your gross monthly income. A low DTI can improve your chances of qualifying for a jumbo mortgage loan. Lenders will accept a maximum DTI of 43%, but a DTI of 36% or less is a better bet when it comes to getting approved for a jumbo mortgage loan.

These strict DTI requirements stem from the Consumer Financial Protection Bureau’s qualified mortgage rule.[2] The rule requires lenders to make reasonable determinations of a borrower’s ability to repay their mortgage.

When applying for a jumbo mortgage, it’s best to minimize your debt and maximize your income. Avoid taking on new loans or lines of credit. It could impede your ability to qualify for a jumbo loan.

Higher cash reserves

Lenders also look at cash reserves during the jumbo loan application process. Cash reserves are the cash or liquid assets you readily have on hand. Most lenders want to know that you have enough to cover at least 1 year of loan payments. Significant cash reserves reassure lenders that you can make your mortgage payments even when you’re not generating an income.

If you’re applying for a standard 30-year fixed-rate jumbo mortgage loan, your monthly payments will likely be substantial. Multiply your estimated monthly mortgage payment by 12 to see what you’d need to save for a year of payments and the minimum cash reserves you should have.

More extensive documentation

Jumbo loans are high-dollar-value loans, which makes them high-risk loans for lenders. It should come as no surprise that a lot more goes into the qualification process than the usual conforming mortgage loan process.

Like traditional mortgages, lenders will ask you to provide proof of employment, 30 days’ worth of pay stubs, W-2 and 1099 tax forms dating back 2 years and proof of nonliquid assets. Lenders may ask for information that covers longer periods to ensure your reliability as a borrower.

If you’re self-employed, chances are you’ll also need to provide a profit and loss statement and balance sheet. Why? Because self-employment can mean unpredictable work and inconsistent income. Lenders want to be extra sure that you’ll be able to cover your mortgage payments.

An appraisal … or two

Thanks to the high value of your potential new home or investment property, your lender will keep a keen eye on the appraisal process. Plan for a second appraisal on the home, especially if the sale price is in the millions.

What To Consider Before Getting a Jumbo Loan

With jumbo-sized loan amounts, you can expect jumbo-sized interest rates and down payments.

Higher interest rates

Jumbo mortgages are starting to carry average annual percentage rates (APRs) that are close to or the same as conforming mortgage rates. But depending on the lender, many jumbo loan borrowers get higher interest rates. With jumbo loan lenders’ stricter underwriting guidelines, you can expect higher rates if your cash reserves or FICO® score hover around the minimum requirements.

If you want to pay less interest on your mortgage loan, hold off on any other big-dollar purchases that may lower your credit score and save more for the down payment. The less of a risk you appear to be to your lender, the lower the interest rate you’ll be able to get.

Larger down payment

One jumbo loan requirement that has eased up in recent years is the down payment requirement.

Back in the day, most lenders required buyers to put down at least 30% of a home’s purchase price. Today, some lenders are issuing jumbo loans for as little as 10% – 15% down. While this sounds like a legit money saver, keep in mind that a higher down payment can help you save on interest payments over the life of your loan. And, if you put at least 20% down, you can avoid the added cost of private mortgage insurance (PMI).

Other pros and cons

Getting approved for a conforming loan is often an easier and safer path since you’re dealing with fewer hoops and lower dollar values. With a jumbo loan, you’re committing to a large mortgage and down payment, tying up liquid cash you may want to invest in other assets.

While jumbo loans have their drawbacks, they also have fewer restrictions than conforming loans. There are a wide variety of eligible property types. You can buy multifamily dwellings, luxury properties and second homes. With the right financial profile, you can buy homes in pricier areas, like that beautiful home in California or that stunning condo in New York.

Jumbo loans can also simplify mortgages for high-value homes because you can take out a single jumbo loan instead of several conforming loans.

Is a Jumbo Loan Right for You?

Eager for the luxury lifestyle of the wealthy, but not sure how to get there? You might be a HENRY. You know: high earner, not rich yet.

HENRYs earn between $250,000 and $500,000 but haven’t saved enough or invested enough to be considered wealthy.

IRL, that might look like having enough cash on hand for a soul-searching trip to India but not enough to afford a seat on Jeff Bezos’ rocket and cruise the edge of space for 11 minutes. If that sounds like you, a jumbo loan may be just what you need to get the home that suits your lifestyle.

Even without a ton in savings or investments, lenders are generally less nervous about providing jumbo loans to high-income earners because of their higher FICO® Scores, strong credit histories and typically solid contributions to their retirement accounts.

Whether you’re a HENRY or not, before you get started on your jumbo loan application, make sure that you match the necessary financial profile and have your documents and credit score in order. Jumbo loans tend to be a smaller market, so you’ll need to research your options to find the best fit.

Go Big and Go (Get That) Home

Ready to move into that luxury home, build a multifamily rental property or start investing in high-end real estate? A jumbo loan might be the next step in your financial journey.

  1. Federal Housing Finance Agency. “FHFA Announces Conforming Loan Limits for 2022.” Retrieved February 2022 from https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Conforming-Loan-Limits-for-2022.aspx

  2. Federal Register. “Qualified Mortgage Definition Under the Truth in Lending Act (Regulation Z): General QM Loan Definition; Delay of Mandatory Compliance Date.” Retrieved February 2022 from https://www.federalregister.gov/documents/2021/04/30/2021-09028/qualified-mortgage-definition-under-the-truth-in-lending-act-regulation-z-general-qm-loan-definition

ICYMI

In Case You Missed It

  1. Jumbo mortgage loans typically have higher interest rates and down payments than conforming loans

  2. You’ll likely need to prove that you have up to 12 months of mortgage payments in cash reserves

  3. Maintain a DTI ratio of 43% or less to improve your chances of getting approved for a jumbo loan

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