What is a jumbo loan?

Published October 12, 2021
by Better

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What You’ll Learn

Which kinds of buying and refinancing scenarios require jumbo loans

Why lenders have stricter qualification requirements for jumbo loans

What types of properties a jumbo loan can be used to finance

What is a jumbo mortgage?

You know what they say: Go big or go home.

But what if you want to go big … with your home?

Buyers exploring homes with higher-than-average price tags (or trying to refinance an existing mortgage balance that’s on the larger size) may need to apply for a jumbo loan. Here’s a quick dive into jumbo loans and how they can help you finance that ritzy real estate you have your eye on.

A jumbo loan definition for beginners

A jumbo loan (AKA a jumbo mortgage) is a home financing option that has two defining characteristics. First, jumbo loan amounts exceed the limits set by the Federal Housing Finance Agency (FHFA) so the term “jumbo” actually refers to the size of the loan rather than the size of the property being financed. Second, if a borrower defaults on a jumbo loan, lenders aren’t protected through federally-backed home mortgage companies like the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

Because these loan amounts are larger than average and can’t be guaranteed upon default, the risk for lenders is higher. Consequently, borrowers have to meet strict requirements to qualify for jumbo loans. For pricey properties, jumbo loans are often the only type of mortgage available to buyers. Some lenders may have a maximum jumbo loan cap on the amount they’re willing to finance. While typical jumbo loan sizes vary, they can be as high as several million dollars.

What is considered a jumbo loan, and what makes it different than other loans?

Every real estate transaction is unique, which is why lenders offer multiple types of loans for borrowers to explore when funding a home purchase or refinance. One of the most common loan types is known as a conventional mortgage. Conventional mortgages are home loans offered by private financial lenders. They are split into two types: conforming and non-conforming.

A conforming loan is a mortgage that fits within the local FHFA dollar amount limit. This is considered a fairly standard mortgage loan, usually offering less stringent qualifying requirements and lower interest rates. A jumbo loan, on the other hand, is a non-conforming loan because it exceeds, or does not “conform to,” the FHFA limit.

Conforming loan limits are set on a county-wide basis by the FHFA each year, based on the current housing market. For 2021, the limit for most counties is $548,250. But in higher-cost areas of the country (think California, New York, and D.C.) the limit can be as high as $822,375.

What types of housing qualify for a jumbo loan?

There are no government restrictions on how jumbo loan funds can be spent, which means these mortgages can be used to purchase various types of housing. Your lender may have specific requirements, but in most cases a jumbo mortgage can be used to buy a primary residence, dream vacation home, or investment property.

Is there risk with jumbo loans?

Risk is a factor in almost any lending decision, and it’s no different with jumbo loans. When it comes to financing or refinancing a home, you should be sure that the cost of the mortgage fits into your overall budget and that you can realistically afford to make payments over the life of the loan. If you can’t meet monthly mortgage obligations, you run the risk of facing fees, damaging your credit score, and ultimately, losing your home to foreclosure.

When it comes to jumbo loans, you’re dealing with large sums of money and significant financial commitment. Luckily, mortgage lenders set specific standards to help determine whether you’ll be able to fit a jumbo loan within your budget. Yes, qualifying can be more difficult for a jumbo than a conventional loan—but those standards are set for good reason. The terms of a jumbo loan often include higher down payments, slightly higher interest rates, and other financial reassurances that help protect you and your lender.

What is a high-balance loan? Is it the same thing as a jumbo loan?

Both jumbo loans and high-balance loans are used to finance properties with above-average price tags, but they’re not exactly the same. Jumbo loans can be issued anywhere in the country, but high-balance loans are only available in counties designated as “high cost” by the FHFA. High-balance loans are actually considered conforming loans, which means they can be guaranteed by Fannie Mae and Freddie Mac. This also means that lenders must follow FHFA eligibility guidelines for high-balance loans, whereas qualifications and lending terms for jumbo loans can vary by lender.

What jumbo loan amount can you get approved for?

If buying your next home or refinancing your large-balance mortgage requires you to apply for a jumbo loan, then you’ll need to meet a few requirements to be approved. Here are some general guidelines:

Credit score

A good to excellent credit score is typically required for jumbo loan qualification. While many lenders require a score of 720 or higher. Better Mortgage offers jumbo loans to borrowers with scores of at least 700.

Debt-to-income ratio

Your debt-to-income ratio (DTI) measures your total monthly income compared to how much you spend on debt payments. Some lenders have a DTI cap of 36% or lower. But with Better Mortgage, borrowers may be eligible for a jumbo loan with a DTI as high as 43%.

Down payment

Jumbo loan lenders may require anywhere between 10% and 30% down for your home purchase. Better Mortgage requires down payments of at least 10%.

Cash reserves

Having additional personal funds could impact the loan amount you get approved for. Depending on the size of your mortgage, you may need to show that you have at least 6 to 12 months’ worth of savings.

Find out if a jumbo loan is right for you

Jumbo loans are for people who want to borrow more than the conforming loan limit allows. If you have a strong credit history, plenty of savings, and consistent income, qualifying for a jumbo loan could be the best way to finance your home. Either way, Better Mortgage can help you get a clearer picture of your homebuying potential and give you access to some of the most competitive rates in the industry. In as little as 3 minutes, you can get pre-approved with Better Mortgage and receive your free, no-commitment pre-approval letter. We’ll show you the types of loans and interest rates you qualify for so you can set your house-hunting budget.

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