What is a Jumbo Loan?

A Jumbo Loan is a type of mortgage used to finance properties that are too expensive for a conventional conforming loan. It is a type of financing that exceeds the limits set by the Federal Housing Finance Agency and is not eligible to be securitized or guaranteed by Freddie Mac or Fannie Mae. That’s why Jumbo Loans are riskier for lenders than conforming loans. 

The value of a jumbo loan varies by state and county. The limit for conforming loans every year is set by the FHFA. In 2020, the limit is set as $510,400 in most parts of the US, but in places where the cost of living is higher, the limit is set as $765,600. These areas include Alaska, Guam, Hawaii, and the US Virgin Islands. 

Jumbo Loans are designed to help borrowers finance luxury properties and homes in competitive real estate markets. For this reason, unlike conventional loans, Jumbo loans have stricter guidelines for lenders to receive them. Below we will go through what a Jumbo loan is and all you need to know to qualify for one. 

Credit Score Requirements

To apply for a jumbo loan, homeowners must undergo rigorous credit requirements than those applying for a conventional loan. To increase your chances of approval, it is recommended that you have a credit score of 700 or higher, which means being in very good or excellent credit before applying for a jumbo loan. Some lenders may require you to have a score as high as 720 and even higher. That’s why you should try raising your credit score as much as possible before applying. 

Debt-to-Income Ratio

Your debt-to-income ratio is the monthly amount you pay toward debts divided by your gross monthly income. To qualify for a jumbo loan, you need to have a very low debt-to-income ratio. Having a low debt to income ratio means that you owe less than you earn, showing that you can afford the high payments that accompany a jumbo loan. Though the exact ratio varies from lender to lender, most require a ratio of around 40%. However, keep in mind that lenders may be a bit more lenient if you have a lot of cash.

Cash Reserves & Documentation

Having ample cash in the bank will help you better qualify for a jumbo loan. Some lenders may require you to show that you are prepared and have enough cash reserves or assets to cover one year of mortgage payments. Also, be prepared to hand over your bank statements, information on your investment accounts, and full tax returns, including your 1099s and W-2s, when applying for a jumbo loan. 

The Benefits

Jumbo loans allow you to go outside of Fannie Mae and Freddie Mac. While you can still finance your home and get a competitive interest rate, you don’t have to be restricted by the dollar limit. 

Additionally, jumbo loans are a solid option for those looking to finance luxury estates in competitive real estate markets, because instead of getting two conforming loans, just getting a jumbo loan is more than enough. 

Bottom Line

Jumbo loans help homeowners finance luxury properties, as it exceeds the limits set by the Federal Housing Finance Agency. This way you don’t need to worry about the dollar limit on conforming mortgages. However, jumbo loans are expensive loans and that’s why before applying for one you should make sure that you can truly afford it to keep up with the payments.