What Are Jumbo Loans And How Do I Qualify For One?
Kevin Graham7-minute read
October 26, 2021
One of the most important components of shopping for a home is identifying the type of mortgage that best suits your needs. You may need a jumbo loan to buy the house of your dreams, or, in some areas of the country, to buy any house at all.
Here’s a guide that can help you decide if a jumbo loan is right for you.
What Is A Jumbo Loan?
A jumbo loan, or jumbo mortgage, is a mortgage loan that exceeds the limits set by the Federal Housing Finance Agency (FHFA). Jumbo loans are called nonconforming loans because they do not conform to those limits.
Because these jumbo mortgages don’t have the guarantees that come with conforming loans, borrowers tend to be subject to greater scrutiny and may or may not higher borrowing costs. A jumbo loan may attract different investors than those who are typically into buying conventional mortgage bonds.
Why Are Jumbo Mortgages Treated Differently?
Here’s how the mortgage industry works: Mortgages are originated by lenders, who immediately sell them to mortgage investors like Fannie Mae or Freddie Mac so that they continue to make loans. But Fannie and Freddie are only authorized to purchase mortgages that conform to the FHFA’s limits.
After purchasing these mortgages, Fannie and Freddie bundle them together with other, similar loans for sale to investors on the secondary mortgage market. A similar process often happens for jumbo mortgages, but different investors are involved.
What Are The Jumbo Conforming Loan Limits?
Fannie and Freddie set limits on how high your mortgage can be – they’re called conforming loan limits. Conforming loan limits vary by state and market. In 2021, you can only borrow up to $548,250 for a single-family unit in most parts of the U.S. However, conforming loan limits go as high as $822,375 in Alaska and Hawaii, where the median price of a home is far above the national average. In other high-cost areas, loan limits are set on a county-by-county basis.
To find the conforming limits where you’re looking to buy a home, check this FHFA map.
What If I Can’t Find A House Within The Conforming Limits?
If you want to own a home in some of the most expensive housing markets in the U.S., you’ll probably need a jumbo loan. Don’t worry, though – you’re not alone. With the currently sizzling housing market, many people are finding that even modest homes require a jumbo mortgage in some areas.
Because of this demand, lenders are becoming more comfortable offering jumbo mortgages. Rocket Mortgage® currently offers the Jumbo Smart loan, which offers loans up to $2.5 million, doesn’t charge PMI and seeks to streamline the amount of paperwork that lenders have traditionally required for amounts above the conforming loan limits.
How Do Jumbo Mortgage Rates Compare To Conforming Loan Rates?
It makes sense that lenders might charge higher interest rates on jumbo loans because, as mentioned before, there’s so much risk involved. However, market data suggests that interest rates on jumbo loans are very competitive with market rates.
At today’s rates, the difference between conforming and nonconforming loans ranges from just 0.25% to 1%. In fact, some jumbo loans have rates that are lower than other mortgage loans.
Today's Purchase Rates
Rate / APR
Pricing is currently not available for the selected value.
- Listed rates are offered exclusively through Rocket Mortgage.
- Mortgage rates could change daily.
- Actual payments will vary based on your individual situation and current rates.
- Some products may not be available in all states.
- Some jumbo products may not be available to first time home buyers.
- Lending services may not be available in all areas.
- Some restrictions may apply.
- Based on the purchase/refinance of a primary residence with no cash out at closing.
- We assumed (unless otherwise noted) that: closing costs are paid out of pocket; this is your primary residence and is a single family home; debt-to-income ratio is less than 30%; and credit score is over 720; or in the case of certain Jumbo products we assume a credit score over 740; and an escrow account for the payment of taxes and insurance.
- The lock period for your rate is 45 days.
- If LTV > 80%, PMI will be added to your monthy mortgage payment, with the exception of Military/VA loans. Military/VA loans do not require PMI.
- Please remember that we don’t have all your information. Therefore, the rate and payment results you see from this calculator may not reflect your actual situation. Rocket Mortgage offers a wide variety of loan options. You may still qualify for a loan even in your situation doesn’t match our assumptions. To get more accurate and personalized results, please call to talk to one of our mortgage experts.
How Does A Jumbo Loan Work?
Like conventional mortgages, you can get jumbo loans in a variety of terms or repayment schedules, and they can be fixed-rate or adjustable-rate loans. At this time, Rocket Mortgage is only offering fixed-rate jumbo loans.
However, jumbo loans work differently than conventional mortgages. These loans have stricter requirements than other types of mortgages, and you’ll have to meet very specific property type, down payment, credit score and debt-to-income ratio requirements to get one.
You can buy various types of properties with a jumbo loan because there are no government restrictions on how you can use your jumbo loan. As long as you meet your lender’s other requirements, you can use most jumbo mortgages for primary residences, vacation houses and investment properties.
Jumbo loans typically have much higher down payment requirements compared to conforming loans. It’s common to see lenders require 20% down on jumbo loans for single-family units. You may also need a higher down payment for second homes and multifamily units. Finally, the down payment required is based on your loan amount and credit score as well.
With Rocket Mortgage’s Jumbo Smart loan, you’ll need a 10.01% down payment for a single-family property up to $2 million. To purchase a two-family property, or duplex, you’ll need a 15% down payment.
Your credit score is a major factor when it comes to getting a jumbo mortgage. Your credit score is a numerical rating of how reliable you are as a borrower. Your score can range from 300 to 850, and several factors are evaluated to determine your credit score.
You’ll usually need a credit score of at least:
- 700, to get a jumbo loan for a one- or two-unit property with a loan limit up to $1 million
- 720, for loans between $1 million and $1.5 million
- 740, for loans between $1.5 million and $2 million
- Between 720 and 760, to buy a second home, depending on the loan amount.
With the Jumbo Smart loan, the minimum credit score for primary residences, vacation homes and investment properties is a 680 median FICO® Score. However, a score up to 760 may be required, depending on property type and your intentions for the property.
Debt-To-Income Ratio (DTI)
Your debt-to-income (DTI) ratio compares how much money you earn versus how much debt you have. To find your DTI ratio, divide all of your required minimum monthly payments by the amount you earn before taxes.
For example, if you pay $1,000 a month in bills and you bring home $2,000 a month before taxes, your DTI ratio is 50%: $1,000 divided by $2,000.
A low DTI ratio is very important when you get a jumbo loan because it tells lenders that you will have enough cash flow to cover your mortgage payments. If you have a higher down payment or credit score, you may qualify for a jumbo loan with a higher DTI ratio.
For a Jumbo Smart Loan from Rocket Mortgage, you'll need a DTI of 45% or lower.
Does The VA Offer Jumbo Loans?
In general, jumbo loans exist outside government-backed mortgage programs, with one exception: the Veteran’s Administration. The VA offers jumbo loans to qualifying service members. In fact, the VA sets no specific loan limits most of the time. The only limit in many cases is based on lender risk tolerance.
For a VA jumbo loan, it’s possible to get a loan without a down payment, but only with a median FICO® Score of 640 or higher for a loan up to $1.5 million. With a median score of 680 or better, you can get a mortgage up to $2 million with a 10% down payment
The VA also allows service members to qualify for a jumbo loan with DTIs up to 60%.
These are the requirements for Rocket Mortgage, but other lenders may have different policies in place.
VA Appraisal Standards
VA property standards are the same for a jumbo loan as they are with a standard VA loan. The home has to be “clean, sanitary, sound and safe” before you move in. Although other loans feature safety checks as well, the VA check is slightly more thorough, in addition to considering the resale value of the property.
You may be wondering how a home being purchased with a jumbo loan can fail to meet livability standards, but even questionable homes in the highest price markets can command seven-figure prices.
VA Funding Fee
The VA funding fee will be higher on a jumbo loan on the basis of the increased loan amount, so it's something to plan for. Depending on factors including your down payment and whether it's your first time using a VA loan, the funding fee is anywhere between 1.4% and 3.6% of the loan amount. The good news is, in addition to covering it yourself, you can ask for a seller concession – or you may be able to finance it into the loan.
Types Of Property
You must intend to live in your home as a primary residence. You can’t buy a vacation home or investment property with a VA jumbo loan. The loan limit for VA jumbo loans at Rocket Mortgage is $1.5 million.
Beyond DTI: Special Requirements For Jumbo Mortgages
When lenders are asked to assume greater risk, they’re going to be particular about who they lend to.
Lenders May Require Cash Reserves
Lenders need to know that you can make consistent, regular payments on a jumbo loan. Your lender will ask you for bank statements to prove that you have money in the bank to keep up with payments. It’s not uncommon for lenders to ask jumbo borrowers to have up to 12 months’ worth of expenses in reserve before they can get a loan.
Having cash in your bank account isn’t the only way to meet reserve requirements. Lenders may consider up to 70% of your retirement account as well, so you don’t need to cash out all of your funds to meet the reserve rule. In some cases, business and gift funds may also go toward your reserve requirements.
Closing Costs Are Higher
Closing costs are usually in the 3% – 6% range of your total home value, but jumbo loans have much higher closing costs than conventional mortgages. On a $500,000 mortgage, you can expect to pay $10,000 – $25,000 in cash at the closing table.
Lenders only offer jumbo loans to buyers who have a predictable and regular income. Lenders often ask to see up to 2 years or more worth of W-2s, tax documents and 1099s when you get a conventional loan. With a jumbo loan, your lender may ask for more documentation and proof that your income is unlikely to change after you get a loan.
Jumbo loans are often manually underwritten. A finance expert will go through your credit report, assets and bank statements with a fine-toothed comb and bring to light any past missteps. If you have a bankruptcy or foreclosure on your report, you’ll have a harder time getting a jumbo loan.
The Bottom Line: Jumbo Loans Make Homeownership Possible Even In The Most Expensive Real Estate Markets
If you want to buy a home in a high-price market, you’ll need a jumbo loan. The good news is that these loans are getting easier to access online and qualify for.
If you’re ready to get rolling, you can start your application right now. If you have questions, feel free to contact one of our Home Loan Experts or call (833) 326-6018 to discuss your particular needs.
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