If you’re wondering why mortgages seemingly come in sizes, like tubs of popcorn at a movie theater, you’re not alone. A jumbo mortgage refers to a loan amount that’s higher than the conforming or high-balance loan limit for a particular county. Presently, Fannie Mae and Freddie Mac set the maximum loan amount threshold for the loans they purchase, so it’s referred to as the conforming loan limit.
As per current loan limits, a loan is considered jumbo if the mortgage amount exceeds $484,350 for a single-family home in all states (except Hawaii, Alaska and few high-cost markets, where the limit is $726,525).
Across the country, the average home loan amount is approximately $354,500 — meaning that most loans are below the conforming limits. In certain areas, like San Francisco, Denver, Austin, and New York however, home prices and loan amounts tend to be much larger, and so do the home mortgages needed to finance them.
Whether you’re purchasing or refinancing, if your loan amount is in the jumbo range, you’ll find that a whole variety of jumbo mortgage products are available. They may not suit every scenario however, so sometimes getting a first mortgage at or below the conforming limit and a second mortgage for the remainder can be an option as well.
How Jumbo Loans Differ from Other Types
A jumbo loan typically has higher interest rate, stricter underwriting rules and requires a larger down payment when compared to a conventional mortgage. Since jumbo mortgages are underwritten to their own sets of standards, often set forth by individual lenders or by the investors who will ultimately purchase the loans, the qualifying criteria differs from other loan types. Conventional conforming mortgages that must meet Fannie Mae or Freddie Mac guidelines have to adhere to a strict interpretation of income, asset, and credit standards. Jumbo lenders have the flexibility to create products in response to investor appetites and market conditions instead.
Securitization is the term used to refer to the buying and selling of mortgage-backed securities (MBS) on the secondary market. For most jumbo lenders, their ability to package and sell loans to secondary investors is the bread and butter of their business. If you think about it, collecting interest payments over 30 years of servicing a loan is a straightforward return on investment — but it ties up the lender’s capital (and their ability to make more loans). Instead, they package loans together in groups based on quality and sell them for an immediate return. Therefore, the jumbo loans they make have to meet certain standards that appeal to investors.
Qualifying for a Jumbo Loan
Lenders who offer jumbo loan products are just as concerned with your ability to repay the loan as lenders who make conforming loans, so they will calculate and consider your debt-to-income ratio as part of qualifying. In general, a total debt to income ratio of <43% is the most desirable, though lenders can choose to accept ratios as high as 45% or even 50% if you have other strong compensating factors.
Jumbo loans may also require two independent appraisals in order to establish the value of the property. The more the home is worth (and the higher the loan amount) the more the lender will want to be sure that their investment is secure. Also, the size and unique features of the property could result in increased appraisal costs — things like being waterfront property, or over 5,000 square feet for example.
The majority of jumbo loans have a reserve requirement, meaning that you need to have a liquid asset account with a predetermined number of months of housing expenses available. This is required as another means for the lender to mitigate the risks of lending large sums of money on a single property.
Your credit scores matter of course, but so does the overall quality of your credit profile when it comes to jumbo home loans. Having a good score but a very thin profile, with few installment or revolving accounts could hold you back. Derogatory information is also going to be scrutinized by the underwriter more closely, so be prepared to explain and provide additional documentation if you have had any credit hiccups in the recent past.
Tips for Maximizing Your Loan Amount
- Minimize the amount of your debts. Debt-to-income ratios are often quite strict when it comes to jumbo mortgages, so reducing your installment and revolving debts as much as possible before purchasing or refinancing is a good idea. Don’t close your credit cards however, as this could actually have a negative impact on your scores (Equifax, Experian and TransUnion all consider the average age of your accounts when calculating your scores, so be sure you don’t close out a longstanding account).
- Maximize your monthly cash flow. The more income you can show, the better, when it comes to qualifying for a jumbo loan. There are even unconventional ways you can show additional income to qualify, such as getting a market rent analysis done on the home you’re selling (but won’t have sold before you purchase your next home) to offset home’s expenses. Certain programs will even allow you to treat substantial assets as a potential source of income, through asset utilization calculations.
- Show significant reserves. Many jumbo loan programs have reserve fund requirements of 6 months, 12 months, or even more depending on your scenario. This means having 6+ months of total housing expenses available in a liquid asset account (like checking, savings, or money market), which includes your principal, interest, taxes, insurance, and HOA dues. Having additional reserves could be the difference between an easy underwriting approval and a much more arduous process.