What is a Jumbo Loan?
Posted by Jason Kauffman on September 19, 2022
Jumbo loans are usually loans that are above the maximum conforming loan limit, currently $684,250 (going higher in late 2022) or loans that are higher than the high-balance conforming limits in the areas that have higher loan limits. Because Freddie Mac and Fannie Mae do not purchase jumbo loans, the lenders that offer these types of loans have their own specific guidelines that govern the qualifications for these loans. Jumbo loan lenders generally have offerings for primary residences as well as second home and investment properties.
Almost all jumbo loans have required down payments of 20% or higher for primary residences and higher down payment requirements for second home and investment properties. There are some lenders that allow for down payments as low as 10% down on primary residences but these programs garner higher rates.
The other factor that drives qualifying for a particular jumbo loan is the loan amount you are seeking. When you go above a $1M loan amount there are more restrictive guidelines. Going above $2M almost always has more restrictive guidelines and higher rates. When you get to loans that are this high, 25%-30% down payments become important in securing the most competitive rates.
Jumbo loan financing poses a particular risk to lenders because they are financing much larger amounts on a single property. This enhanced risk results in much higher credit score requirements, especially at the lower down payment offerings. You will see a gradient in interest rate cost on credit scores that often goes into the high 700’s. This means that the higher your credit score is the better your interest rate pricing will be.
Outside of merely qualifying for being able to afford the monthly payment, most jumbo loan programs will require the borrower to have additional monies, outside of the down payment, available in reserves. These reserve requirements can be often met by retirement assets and other assets that are not traditionally liquid. The requirement on those types of assets is that the assets can be accessed in case of a financial emergency. Many Jumbo guidelines seek 12-24 months of mortgage payments in some sort of accessible reserve account for qualifying purposes.
Homes that are being financed by jumbo loans are usually at the high end of a given market. Higher end homes historically are more susceptible to market fluctuations, so jumbo loan investors will apply more scrutiny to the loans being made at these levels. The higher the loan amount the more scrutiny is applies. It is not uncommon for a jumbo loan lender to require a desk review of an appraisal (essentially a second appraiser reviewing an appraisal report). Loans made above $2M typically will require a second appraisal and the lower of the two appraisals will be used. Knowing this is important because the timing on a purchase closing can be affected by the need for a second appraisal or review of the first appraisal.
Obtaining a conventional loan is generally easier and there are many different systems that simplify the underwriting process. When you are applying for a Jumbo loan, there is almost always a requirement for tax returns, additional income documentation, and a higher degree of review when it comes to the income of the borrower. The added risk associated with a jumbo loan requires the underwriting process to be more arduous than a standard conventional loan, so being prepared for the jumbo underwriting process will ensure the process goes more smoothly.
Obtaining a Jumbo loan is not terribly different than the typical conventional loan process, but the added rigor of the underwrite make it worth finding an experienced mortgage professional to help streamline the process for you.