What to know before stepping into the high-end property market.
Although jumbo loans enable you to borrow more money than conventional loans, they’re typically more expensive and can be harder to qualify for. Weigh the pros and cons before signing on the dotted line.
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Lenders that offer jumbo loans
What is a jumbo loan?
A jumbo loan is a mortgage product that has a higher lending limit than a conforming loan, as governed by Fannie Mae and Freddie Mac. The limit on conforming loans is $484,350 for all states excluding Hawaii and Alaska — and jumbo mortgages exceed this limit.
Because there is often a high risk attached with borrowing more money, lenders will charge a higher interest rate. You’ll also likely face stricter underwriting and larger down payment requirements due to the size of the loan.
Jumbo loans are available for primary residences, vacation homes and investment property types. Fixed and adjustable rates are available.
Is a jumbo loan right for me?
If you’re thinking of purchasing an expensive property with a mortgage of over $484,350, then you must get a jumbo loan. Since a jumbo loan requires a low debt-to-income ratio, a high credit score and a large down payment, they’re better suited to high-income earners who have financial discipline and a good credit history.
Pros and cons of a jumbo loan
Pros
- Access to significant funds. A major benefit of a jumbo loan is that you can access a substantial amount of funds that exceed the limits of a conforming loan. This means you can more easily purchase a luxury or high-value property.
- Convenience. With a jumbo mortgage, you don’t have to take out two or more loans. Instead, you simply manage the one mortgage.
- Different rate programs. You can choose from a fixed or adjustable rate, which provides you with the flexibility to structure the loan in a way that suits you.
Cons
- Higher interest rate. Due to the higher degree of risk to the lender, banks will normally charge an interest rate that is 0.5% to 1.5% higher than a traditional loan.
- Market risk. If your property falls in value, you’ll lose equity in your home, which could be problematic since jumbo loans typically come with higher interest rates.
- Stricter credit requirements. It’s more difficult to be approved for a jumbo loan compared to a standard mortgage. You need to provide evidence that you have the income to afford this type of loan. If you have a credit score lower than 600, you’ll likely have to provide a larger down payment to offset the risk.
- Difficult to refinance. Jumbo loans can be difficult to refinance during the loan term. This means that if you have a fixed interest rate, you may find it difficult to refinance with another lender to take advantage of a lower rate.
What’s the difference between a jumbo and a conventional loan?
The main difference between a jumbo mortgage and a conventional mortgage is the amount you can borrow. If you want to get a home loan for more than $484,350, you’ll need to apply for a jumbo loan. Any amount below that is classified as a conventional loan.
Because jumbo mortgages aren’t guaranteed by the FHA, VA or the USDA Rural Housing Service, they represent a higher risk to the lender. Consequently, they come with higher interest rates and costs.
Is a jumbo loan risky?
Generally, a jumbo mortgage is considered riskier than other types of mortgages because they’re not regulated by Freddie Mac or Fannie Mae. The loans are often larger, require a bigger down payment and cost more in general. However, in recent years, the spread in interest rates between jumbo and traditional loans has reduced.
Will I qualify for a jumbo loan?
To qualify for a jumbo mortgage, you’ll generally need to meet the following criteria:
- Good credit history. You’ll typically need a FICO score of 700 or higher and show at least six months worth of recent mortgage payments in your bank account.
- Income and assets. When you apply for a jumbo loan, you’ll need 20% of the loan value as a down payment. The lender will therefore need to see evidence of your employment, earning potential and assets to ensure that you can repay the loan.
Do I have to pay private mortgage insurance (PMI)?
Private mortgage insurance is insurance that you purchase to protect the lender if you default on a conventional loan. However, there is no PMI within the jumbo loan industry, which means you’ll most likely need to come up with a down payment of 20% — higher compared to standard loans.
Bottom line
If you want to purchase a property with a mortgage of more than $484,350, you’ll need a jumbo loan. Due to their larger amounts and other factors, they’re inherently riskier. Compare your mortgage options to find the right loan for your circumstances.
Frequently asked questions about jumbo loans
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