Jumbo Loans: Differences, Qualifications, & Additional Considerations

You're about to make an offer on the home of your dreams when someone–your real estate agent or a mortgage lender–says you'll need a jumbo loan. What is a jumbo loan? When does a homebuyer need a jumbo loan? What's the difference between a jumbo loan and a conventional loan? And, perhaps most importantly, how does one qualify for a jumbo loan?

If these are questions you find yourself asking, here's a brief explanation of the what, when, and how of qualifying for jumbo loans.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

Conforming Loans vs. Jumbo Loans

Any mortgage more than a set dollar figure is a jumbo loan, no matter what size the home is. As of January 2021, the number was $548,250 (higher in expensive markets such as San Francisco or Hawaii). Any loan under the magic number is called a conforming loan, and anything over is a jumbo loan. In January, the median single-family home price was $346,400 and rising, so you don't have to buy a palace to find yourself in jumbo loan territory.

The figure meets the lending guidelines of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). These organizations don't buy jumbo loans.

Why does this matter if you're getting a conventional loan through a bank? Most lenders resell their loans, and Fannie Mae and Freddie Mac are the principal buyers. If banks write conforming mortgages, they don't take on much risk. They can resell them to the federal agencies and get the loans off their books. When lenders write jumbo loans, however, they generally can't resell them. They're on the hook if the loan defaults.

For borrowers, this means that while qualifying rules vary little from lender to lender on conforming loans, they can be much different between lenders of jumbo loans. Rules may also more stringent. With jumbo loans, it's even more important to shop around.

However, unlike other jumbo loans, VA jumbo loans can be securitized, just like a conforming loan. In this case, Ginnie Mae is the organization involved. Qualified veterans can still get a $0 down payment with a VA jumbo loan, though credit and income requirements may be more strict.

Specific Qualifying Standards for Jumbo Loans

Borrowers undergo additional scrutiny when they apply for a jumbo loan. The lender may ask for more documentation. Here are some differences borrowers might see.

Credit Score: Borrowers might get a conforming loan with a credit score of 620. The same is true for qualifying for most VA loans. For a jumbo, a lender is likely to require 680, 700, or even higher.

Debt-to-Income Ratio (DTI): DTI compares a borrower's pre-tax income with their monthly credit payments, not just for mortgages but also car loans and personal loans. If a borrower earns $8,000 per month and makes $4,000 in debt payments, the DTI is 50%. Conforming loans usually require a DTI under 50%. Jumbo lenders generally put the cutoff between 38–45%.

Down Payment: The best mortgage terms require 20% down, but borrowers might qualify for a conforming loan with only 3–5%. A jumbo loan usually requires the full 20%, although some lenders may go as low as 10%.

Reserves: Jumbo lenders need assurance that a borrower will continue making payments. They may require borrowers to show cash reserves for anywhere from 6–8 months of payments.

Appraisal: More expensive houses are harder to appraise. Many jumbo lenders require two appraisals.

Other Considerations for Jumbo Loans

• Closing costs tend to be higher with jumbos.
• Interest rates usually run 0.25%–1% more, but by shopping around, borrowers may find a jumbo loan at the same rate as conforming.
• For loans close to the jumbo cutoff, borrowers may qualify for a conforming loan by increasing their down payment.
• Remember that the dollar limit applies to the mortgage, not the total sale price.

By shopping around and researching your options, you can be confident that acquiring a jumbo loan is just as manageable as any other loan you may need.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.