Jumbo Loans for Beginners

Kimberly Rotter


A jumbo mortgage sounds like the stuff of millionaires, but that's not necessarily true. While it is a larger debt than most home mortgages, a jumbo loan may be your best choice, depending on your income, the price of the home you want to buy and the menu of loan options available to you.

Learn what a jumbo loan is, how to get one and whether it's a smart move for you.

What is a Jumbo Loan?

A jumbo mortgage, also called a jumbo loan, is a mortgage that exceeds conforming loan limits set by the Office of Federal Housing Enterprise Oversight. Conforming loan limits cap the dollar value on loans that are backed by a government-sponsored program or enterprise.

"A nonconforming loan is any mortgage that doesn't fit in the Fannie Mae, Freddie Mac and FHA box," says Stephen Moye, senior loan officer at Citywide Home Loans. "'Jumbo' means the loan exceeds the loan limit set for the metro area where the home is located."

How Big Is a Jumbo Loan?

A mortgage doesn't have to be seven digits to be called a jumbo loan. A loan amount of even $1 more than the loan limit for your county puts it into jumbo loan status.

In the vast majority of U.S. counties, the conforming loan limit for a one-unit property in 2018 is $453,100, but some counties have higher limits, so a jumbo loan in one city can be a conforming loan in another. Conforming loan limits are higher in high-cost areas like Northern California and New York City, and highest in Honolulu, at $721,050 for a one-unit property.

[Read: The Best Mortgage Lenders of 2018.]

Limits are tied to local median home values, and you can find the limit for each county on the Federal Housing Finance Agency's website.

According to Zillow, some lenders categorize any loan above $453,100 as jumbo, even if the conforming loan limit for your county is higher.

How Do You Qualify for a Jumbo Loan?

Jumbo loan approval is based on the same basic formula as any other mortgage. Eligibility depends mainly on income, cash reserves, credit score, debt, employment status, property type and property use.

Qualifying for a jumbo loan tends to be a little harder than qualifying for a conforming loan. When a loan falls outside the parameters set by the government, the lender has to mitigate financial risk in other ways. Jumbo loans are manually underwritten, and all factors are considered carefully; the qualifications tend to be more stringent.

"The documentation requirements are much higher on a jumbo loan than on a conforming loan," says David Battany, executive vice president, capital markets at Guild Mortgage Co., "particularly after the housing crisis. This can be a surprise for some borrowers. The underwriter will examine at a much deeper level of detail the applicant's tax returns, assets and other qualifications."

You'll need to meet, and in some cases exceed, the standard requirements for a conforming mortgage. Each lender sets its own eligibility criteria.

Moye says, "Usually your credit score has a lot more weight in a jumbo application. Reserves also have more weight, as do prior credit events. If you have a bankruptcy, it has to be older. A foreclosure can disqualify you."

Keep in mind that if your application is weak in one area, you may be able to make up for that weakness with a stronger showing in another. For example, if your credit score is on the low side, you may qualify with a larger down payment.

Credit score

Credit score requirements are higher for a jumbo loan. Some conforming mortgage programs are available to applicants with a credit score as low as 500, but for a standard jumbo loan, you'll usually need a credit score of at least 680. Many jumbo loans require a score of 700 to 720 or higher.

Generally speaking, the credit score requirement will reflect the loan amount, the size of the down payment and the amount of debt you carry. A lower credit score is not an insurmountable barrier to a jumbo loan. Although the best loan products are offered to applicants with higher scores, many programs are tailored to borrowers with weaker credit.

Debt-to-income ratio

The allowable debt-to-income ratio may be lower for a jumbo loan than for a conforming mortgage. A high DTI, if allowed, will probably result in a more expensive loan. In an example offered by Moye, an $800,000 loan in San Diego jumped from a best interest rate of 4.75 percent to 5.375 percent when the DTI increased from 43 percent to 48 percent.

For qualified jumbo loans -- meaning the loan has features that make it more likely that you can afford to repay it -- expect to see a DTI limit of 43 to 45 percent or lower.

Reserves

Under most circumstances, mortgage lenders want the applicant to have some cash available in case of an emergency. For conforming loans, the cash reserve requirement may be as little as one month's housing expenses. Your jumbo mortgage lender will probably require between three and 24 months' reserves.

You can satisfy the reserve requirement in several ways. Obviously, money in the bank qualifies as a liquid asset. If you have a retirement or other investment account, the lender may consider 70 percent of your balance to be liquid; you don't have to cash out the account for the purposes of the mortgage application. In some cases, gift or business funds can be used to meet the reserve requirement.

An exception to the reserves requirement may be granted if your DTI is very low or your down payment is high.

Down payment

A 20 percent down payment is the gold standard for mortgages, and in the not-too-distant past, some jumbo mortgage lenders required even more. Today, however, jumbo loans are available with much less of your own funds down.

[Read: How to Get a Mortgage With No Down Payment.]

Some borrowers who want to avoid paying private mortgage insurance, or PMI -- required when a loan is more than 80 percent of the purchase price -- without a 20 percent down payment take out a piggyback loan. A piggyback loan is a second mortgage taken at the same time as the first mortgage to cover a portion of the purchase price. For example, a first mortgage for 80 percent of the purchase price, a second mortgage for 10 percent and a down payment of 10 percent is a common scenario.

You should ask your lender whether down payment assistance is permitted. Most allow at least a portion to come from gifted funds.

Expect to pay at least 5 percent down from your own funds. If you make a down payment lower than 20 percent, you will probably pay a higher interest rate or mortgage insurance premiums, or both.

Some lenders, including Guild Mortgage and SoFi, offer 10 percent down jumbo loans with no mortgage insurance requirement. SoFi's 10 percent down jumbo loan has a maximum loan value of $3 million.

Is There a Government-backed Jumbo Loan?

Many government-backed mortgages are designed for moderate- and low-income borrowers. The U.S. Department of Agriculture loan program has strict income limits that make it virtually impossible to qualify for a jumbo loan because you won't pass the DTI test.

The Federal Housing Administration loan requires PMI for the life of the loan, so using a piggyback loan to bring the balance down to conforming loan limits doesn't make financial sense. Borrowers would be better served with a non-FHA loan product.

The U.S. Department of Veterans Affairs program, however, can be used for a jumbo loan. The VA will insure the portion of your loan that falls under conforming loan limits. The down payment requirement is based on the portion of the loan that is above the conforming loan limit. If you want to borrow $500,000, for example, you will need to make a down payment of $11,725 (25 percent of the amount that exceeds the conforming loan limit of $453,100). This loan is available from some lenders with zero down and no PMI.

Where Can You Get a Jumbo Loan?

Many mortgage lenders make loans above conforming loan limits.

Moye says that investment banks tend to have the most competitive rates on jumbo loans. "A high-quality lender may offer a jumbo loan as a loss leader in order to market other financial products to the borrower."

Talk to several lenders or to a broker who can inquire with multiple lenders at once.

Some borrowers will qualify for special loan programs like physician loans, available to licensed doctors and dentists. This program is available in jumbo loan amounts with zero, 5 or 10 percent down, from several lenders, including Fifth Third Bank, SunTrust Mortgage and Citizens Bank.

Do Jumbo Mortgages Have Higher Rates Than Conforming Loans?

Although it would seem to make sense that a larger loan inherently carries more financial risk to the lender than a smaller loan and that the interest rate would be higher as a result, jumbo loan interest rates are not very different from the rates on conforming loans, and in many cases are lower.

"Historically, jumbo loan rates were about a quarter percent higher than conforming rates," says Battany. "Higher-priced homes were susceptible to larger fluctuations in values, which meant more risk for the lender."

In today's market, however, jumbo loans can be priced as much as one-quarter percentage point lower than conforming loans.

For example, on Bank of America's online rate calculator recently, a jumbo loan for $800,000 in San Diego showed an interest rate of 4.375 percent for a 30-year fixed-rate mortgage on a $1 million purchase price. In the same ZIP code, a loan for $320,000 showed an interest rate of 4.5 percent for a 30-year fixed-rate mortgage on a $400,000 purchase price.

Is the Interest on a Jumbo Mortgage Tax-deductible?

New tax laws in 2018 have confused many homeowners about the tax deduction on mortgage interest. The changes don't affect most borrowers with conforming loans, but jumbo borrowers need to know the details.

Interest on the first $750,000 in mortgage debt for your primary residence or second home is tax-deductible. And the limit is $375,000 for those who use the married filing separately tax status.

If you already had a home mortgage before Dec. 16, 2017, and you want to refinance, you can still deduct the interest on up to $1 million in mortgage debt, so long as the refinanced amount does not exceed the balance on the original loan at the time you refinance.

There are some wrinkles in the new rules, particularly if you also have home equity debt, so consult a tax professional about your situation.

[Read: The Best Home Equity Loans.]

Red Flags for Lenders

Jumbo loan applications are more closely scrutinized than conforming loan applications. "These are some of the most common issues we see that could potentially hold up a jumbo loan application," says Battany:

-- Unable to show two years of stable employment history

-- Recently changed from a W-2 job to self-employed

-- Assets can't be verified during underwriting

-- Questions arise about the source of the down payment and cash reserves

Who Should Get a Jumbo Loan

Jumbo loans, for purchase or refinance, are available for all types of homes, including primary residences, second homes and investment properties.

It is a persistent myth that jumbo loan borrowers are in all ways better applicants than other borrowers, but there are some clear distinctions. Most importantly, a jumbo loan borrower needs sufficient income to cover the payment on the larger loan and more liquid assets to meet the cash reserve requirement. That doesn't mean a person who lives paycheck to paycheck can't qualify, and jumbo loans are available to consumers with a wide range of credit profiles.

As Erin Watts, Guild Mortgage vice president for product strategy, says, you don't need to be a seasoned mortgage borrower to qualify for a jumbo loan program.



Kimberly Rotter is a consumer credit expert and personal finance writer and editor. Her work has appeared in major national publications, including U.S. News & World Report, Yahoo Finance, MSN Money, Investopedia, Business Insider and Fox Business. Follow her on Twitter @RotterWrites.