What is a jumbo loan?
Looking to buy the house of your dreams? You may need a jumbo loan. A jumbo loan is a mortgage that exceeds the limits set by the Federal Housing Finance Agency (FHFA). Jumbo loans are non-conforming loans as they cannot be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac. The main advantage of a jumbo loan is that it lets you borrow more than the limits imposed by Fannie and Freddie.
In most counties, the maximum conforming loan limit for a single-family unit in 2022 is $647,200. You can use a jumbo mortgage for primary residences, vacation homes, or investment properties, as long as you meet your lender’s requirements. Since jumbo loans are riskier than conventional loans, they are typically reserved for high-income borrowers with high credit scores and significant cash reserves.
Who qualifies for a jumbo loan?
To qualify for a jumbo loan, you’ll need a:
- High credit score
The minimum credit score for primary residences, vacation homes, and investment properties is a 680 median FICO® Score. However, you’ll usually need a credit score between 700 and 740, and sometimes as high as 760, for loans between $1 million and $2 million.
- Low debt-to-income (DTI) ratio
Your debt-to-income (DTI) ratio compares how much you owe each month to how much you earn. Most jumbo mortgage lenders will not approve a borrower with a DTI exceeding 45%.
- High cash reserves
The specific income levels and cash reserves needed will depend on your loan. On top of the documentation required for a typical conventional loan, additional documentation, proof of income, and higher cash reserves may be required to qualify for a jumbo loan. Some lenders may even require up to one year of mortgage payments in reserves.
- Bigger down payment
While conventional loans may require a down payment of as little as 3%, lenders may require a down payment of 10% to 30% for jumbo loans. Ultimately, the down payment required will vary depending on your loan amount and credit score.
Since they are not guaranteed by Fannie Mae and Freddie Mac, jumbo loans pose a greater risk to lenders, leading to stricter underwriting guidelines. Along with tougher qualifications, you may experience higher interest rates, additional documentation requests, and higher closing costs and fees when applying for a jumbo loan.
If you have a high credit score, low DTI, high cash reserves, and the ability to pay a larger down payment, you’re on the right track to qualifying for a jumbo loan.
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Originally published July 12, 2021, updated August 24, 2022.