What is a jumbo loan?
Dreaming big? Really big? It just might take a jumbo loan to get you into that home you can’t stop thinking about. Jumbo loans cater to buyers in pricier markets, offering a pathway to ownership when traditional mortgages just aren’t enough. Let’s look at how they work and what it takes to get one.
So, what is a jumbo mortgage loan exactly?
A jumbo loan is a type of mortgage that lets you borrow more than the standard or “conforming” loan limits set by the Federal Housing Finance Agency (FHFA). This is why jumbo loans are also called non-conforming loans.
While jumbo loans are a go-to for buying pricier properties, it’s important to know they also come with unique requirements.
How do jumbo loans work?
Jumbo loans work like other mortgages, but they’re tailored to high-ticket properties that regular loans just can’t cover. They can be used to purchase a primary home, secondary home, vacation home or even an investment property you’ve had your eye on.
Because jumbo loan amounts are quite large, your lender will be taking on extra risk. To balance things out, these loans come with stringent underwriting rules. Lenders will look more closely at your financial details, including everything from your credit score to your cash reserves. They need to make sure you can comfortably handle this debt every month.
Securing a jumbo loan is all about proving you’re in a great place to manage a major investment. If you're on sound financial footing and set on buying a one-of-a-kind property, a jumbo loan might be your best way in.
Jumbo loan requirements
Because jumbo loans let you borrow more money, they require stellar credit and ample cash. Lenders will go over your finances with a fine-toothed comb, but this is a good thing—it helps protect both you and the lender. Let’s take a look at what’s required.
Jumbo loan limits
You may be wondering who decides these jumbo loan limits. Let’s break it down:
Every year, Fannie Mae and Freddie Mac work with the Federal Housing Finance Agency, or FHFA (their U.S. regulator) to set the maximum loan amounts they will purchase.
Loan amounts that exceed these limits are referred to as non-conforming or jumbo mortgage loans. These higher borrowing limits come with more risk for lenders, however. Because jumbo mortgages let you borrow more than the FHFA limit, they’re not insured by the government. That extra risk is passed on to the banks, who then reduce their risk by having stricter requirements.
Jumbo loan interest rates
Jumbo loan interest rates are influenced by market conditions and the level of risk involved. To manage the increased risk associated with these larger loans, lenders often implement strategies such as setting higher interest rates.
The good news is that jumbo loan interest rates may still be quite competitive, especially if you have a strong financial profile. The better your financial health, the less risky you appear to lenders. If you have an impressive credit score and a low debt-to-income ratio, you could be in a good position to get a favorable rate.
Jumbo loan down payments
Jumbo loan down payments vary by lender. Remember, the bigger the loan, the more skin lenders have in the game. So, if your heart is set on a particularly pricey property, it’s best to be prepared to put down a substantial chunk of change to make that dream come true.
However, if your down payment is less than 20% of the purchase price, you should expect to add private mortgage insurance to your monthly costs.
You’ll want to make sure you've got enough in the bank to handle at least six to twelve months of mortgage payments, including property taxes, homeowners insurance and any HOA fees. Lenders may need to see that you can keep up with payments, even if things get a bit tight financially.
Jumbo loan mortgage insurance
Typically, if you make a down payment of less than 20%, you'll need to pay for private mortgage insurance (PMI). This applies to most conforming mortgages as well as jumbo loans.
PMI is a type of mortgage insurance that covers the lender in case you default on your loan. It's usually required for loans where the loan-to-value ratio exceeds 80%, due to the higher risk involved. PMI costs can be significant, particularly for jumbo loans, but there may be some exceptions, so it’s best to chat with a mortgage specialist to see what option works best for you.
Pro Tip
Certain types of properties may face restrictions when qualifying for a jumbo mortgage. While single-family homes generally qualify, there could be additional requirements for condos, multi-unit properties or investment properties. Check with your lender for details.
Jumbo loan credit score
Because of the larger loan amount, the credit eligibility requirements can be more rigorous. Lenders usually extend jumbo mortgages to highly qualified consumers. It should come as no surprise that your credit score will play a pivotal role in the jumbo loan picture. You’ll probably need a minimum score of 700. However, for larger loan amounts, be prepared for lenders to expect even more. They need to be sure you’re a safe bet for such a significant financial commitment.
The takeaway: Keeping an eye on your credit report is a must if you’re diving into the high-end housing market. Aren’t you glad all those bills have been set to autopay?
Jumbo loan DTI
Similarly, the debt-to-income (DTI) ratio is key. Lenders may want to see a DTI ratio no higher than 43%, but they often prefer if it’s even lower, around 36%. This helps ensure that you’re not taking on more debt than you can handle, which is a win-win for all parties. Keeping your debt low is the way to go when you're looking to buy in a high-cost area.
Jumbo loan income requirements
Lenders will expect borrowers to demonstrate their ability to pay the higher loan amount. A healthy salary is essential, but for a jumbo home loan, lenders are particularly focused on income stability. They'll ask you for documented proof that your income has been consistent over the past few years.
You will likely need to provide proof of income with W-2s or tax returns from the past two years, recent pay stubs, bank statements and proof of any commissions or bonuses you’ve received. If you’re self-employed or own a private business, you may need to provide financial reports for the business.
How is a jumbo loan different from other loans?
Let’s look at how a jumbo loan compares to the popular conventional loan.
| Feature | Jumbo Loan | Conventional Loan |
|---|---|---|
| Loan Limits | Exceeds the conforming loan limits set by Fannie Mae and Freddie Mac | Within the conforming loan limits set by Fannie Mae and Freddie Mac |
| Interest Rates | Typically higher due to the increased risk to lenders | Generally lower compared to jumbo loans |
| Down Payment | Usually 10-20% or more | Can be as low as 3% for qualified buyers |
| Credit Score Requirements | Higher credit score required, often 700+ | Lower minimum credit score, typically around 620 |
| Debt-to-Income Ratio | Stricter, usually around 43% or lower | More flexible, can be up to 50% with strong credit |
| Loan Approval Process | More stringent, due to the larger amount being borrowed | Generally less stringent |
| PMI (Private Mortgage Insurance) | Not typically required, due to the higher down payment | Required if down payment is less than 20% |
Alternatives to a jumbo loan
If you're looking into buying a high-priced or luxury home but find the idea of a jumbo loan a bit daunting, there are other options out there that might fit your needs just as well. Let's chat about some alternatives you might consider:
Piggyback loans: This is exactly as it sounds. It involves one loan piggybacking off another. Instead of one big loan, you get two smaller ones. Typically, you'll take out a conventional loan for 80% of the home's price and a second smaller loan, like a HELOC, for the next 10% or 15%. You'll cover the remaining 5% to 10% with your down payment. This way, you can avoid the higher interest rates and stricter requirements of a jumbo loan.
Cash-out refinance: If you already own a home and it has increased in value, you might consider a cash-out refinance. You can refinance your current mortgage and borrow more than you owe, using the extra cash as a down payment for your next home. This can help you keep your loan amount below the jumbo threshold.
Each of these options has its pros and cons, so it's a good idea to chat with a Citi specialist to see which one might be the best fit for you and your home-buying goals. Remember, the right mortgage solution for you is out there, and sometimes it just takes a little digging to find it!
How do I apply for a jumbo loan?
Here’s a step-by-step guide to help you navigate the application for a jumbo loan:
- Check your credit score: Jumbo loans have stricter credit requirements due to the higher loan amounts.
- Gather required documents: You will need comprehensive documentation for a jumbo loan, including detailed proof of income, tax returns, extensive employment verification and a complete list of assets and liabilities.
- Get pre-approved: Pre-approval is extremely valuable, especially for a jumbo loan. It helps show buyers you're serious and gives you an edge when bidding for houses in a competitive market.
- Submit your loan application: Once you’ve found your perfect home, it’s time to submit your jumbo loan application along with all the necessary documentation.
- Loan processing and property appraisal: The lender will assess your financial background, conduct a thorough credit check, and appraise the property to ensure it can support the loan amount.
- Close on the Loan: If your application is approved, the final step is closing, which involves signing the loan agreement, paying any applicable closing costs and finalizing the loan.
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