What is a jumbo loan and how do you qualify?
- A jumbo loan is a mortgage above the borrowing limit for ordinary mortgages set by the FHFA.
- In 2021, a jumbo loan is equal to a mortgage over $ 548,250 in most parts of the United States.
- You will have to meet more stringent requirements to receive a jumbo loan, including a larger down payment.
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A jumbo loan, also known as a non-conforming loan, is a type of conventional mortgage. The loan exceeds the conforming loan limits of the Federal Housing Finance Agency (FHFA).
The FHFA sets the limit for compliant loans each year, and in 2021, limit is $ 548,250 in most areas of the United States. In areas with higher cost of living, such as Alaska, Hawaii, Guam, and the U.S. Virgin Islands, the limit has been increased to $ 822,375.
Jumbo loans are riskier for lenders than compliant loans because they cannot be Fannie Mae or Freddie mac. As a result, lenders usually have more stringent guidelines for borrowers to receive jumbo loans.
Things to consider before applying for a jumbo loan
A jumbo loan can help you afford a more expensive house, but there are some factors to consider before applying. Each lender has different qualifications to receive a jumbo loan, but here are some general guidelines you can expect:
You will need a larger down payment than for a compliant loan
Many lenders accept down payments of 10% or less for compliant loans, but require at least 20% upfront for a jumbo loan.
You will need a good credit score
Before they lend you hundreds of thousands of dollars, lenders want to know that you are financially responsible. You will need a higher credit score to qualify for a jumbo loan than you would for a compliant loan – probably at least 700. But the higher your score, the better the rate you will get.
You will need a lower debt-to-income ratio
Your debt ratio is the monthly amount you pay for your debt divided by your gross monthly income. For example, if you spend $ 2,000 per month on your mortgage and student loan payments and earn $ 3,000 per month, your debt-to-income ratio is $ 2,000 divided by $ 3,000, or 66%.
Your exact debt-to-income ratio required will depend on your lender, but the business will likely need a lower ratio for a jumbo loan to a compliant loan. Most ask for a ratio of around 40%, give or take a few percentage points.
A lower ratio means you owe a lot less than what you earn, leading lenders to believe that you can afford the high payments that come with a jumbo loan.
Your rate will likely be higher
As with a compliant loan, your jumbo loan rate will depend on factors such as your credit score, your down payment, and the length of the term. But in general, you can expect jumbo loan rates to be a bit higher than compliant loan rate.
Between the relatively high principal and the higher rate, you have the potential to pay a large chunk of interest over the years. This doesn’t necessarily mean that you shouldn’t take out a jumbo loan, but it’s something to keep in mind.
Shop for a jumbo lender
During the coronavirus pandemic, some lenders have placed more stringent requirements on borrowers applying for a jumbo loan. It’s always important to do your research, but especially during the pandemic, make sure you know if a lender’s current requirements match what is posted on their website.
If necessary, take the time to boost your credit score or save more for a down payment. Taking the necessary steps can increase your chances of getting approved for a jumbo loan and getting a lower rate.
Finally, shop around for a lender. Some lenders will charge lower down payments or higher debt-to-income ratios than others, and some will offer you a better rate. Do your research, or go through a mortgage broker for a professional to do the research for you.