The Ins and Outs of Jumbo Mortgages

The real estate market has continued to soar in many parts of the United States, leading more home buyers to consider jumbo loans to finance their purchases.

But what exactly is a jumbo mortgage?

A jumbo mortgage is a type of loan that exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA). In 2024, the conforming loan limit for a single-family home is $726,200 in most areas, and $1,089,300 in high-cost areas. Any loan amount above these limits is considered a jumbo mortgage.

Jumbo mortgages typically offer competitive interest rates compared to conventional loans, but they also have stricter income, appraisal, and credit score requirements.

How to Qualify for A Jumbo Mortgage

The first thing to understand about jumbo mortgages is that each lender has their own maximum loan amount and underwriting is typically stricter since banks are at at more of a risk in the event you default on your payments.

Much like applying for a regular mortgage, you’ll have to meet the following criteria:

• Have a debt-to-income (DTI) ratio of 43% or less, and sometimes even lower depending on the lender. You’ll need to prove your income through W-2s, 1099s, investment accounts, bank statements, and/or tax returns.
• Have a credit score of at least 700, although some lenders may require a higher score.
• Have assets that equal at least 6 months of mortgage payments in reserves.
• Provide documentation proving ownership of other real estate, non-liquid assets, and other loans held.
• Get two property appraisals to justify the purchase price.

Keep in mind that while these mortgage loans fall under the non-conforming category, they still follow the Consumer Financial Protection Bureau guidelines.

Interest Rates On Jumbo Mortgages

In recent years, interest rates on jumbo mortgages have become more competitive with conventional loans. In some cases, jumbo mortgage rates are even lower than conforming loan rates. Typically, banks charge interest rates that are 0.25 to 1.5% more on jumbo loans compared to conventional mortgages.

Down payment requirements for jumbo loans have also loosened up. In the past, you may have needed to put down as much as 30% of the total home purchase price, but now you may be able to get away with as little as 10-15% down, depending on the lender’s underwriting criteria.

Who Is A Jumbo Mortgage Best For?

Jumbo loans are best suited for high-net-worth individuals, often referred to as “HENRYs” (high earners, not rich yet). This group typically includes high-income earners making an estimated $250,000 to $500,000 annually.

HENRYs may not have the wealth needed to buy a luxury home outright, but they usually have excellent credit scores, credit history, and established retirement accounts that meet the reserve requirements for jumbo loans.

If this describes your current financial and credit situation, and you have been eyeing a special property, you may want to consider applying for a jumbo loan.

Reasons Why A Jumbo Loan May Be A Good Option for You

Jumbo mortgages can help make your dream of owning a high-end home a reality. But that’s not all. Here are a few other benefits to consider:

• Jumbo loans typically have a hefty down payment requirement. The good news is that you’ll forego paying for private mortgage insurance (PMI) if you can afford a downpayment that’s at least 20% of the purchase price of the home.
• It’s easier and more cost effective than taking out a first and second mortgage to finance the property. Having to take out two separate loans means two sets of paperwork, meeting underwriting requirements for two different loans, and closing costs for 2 separate loans.
• Keep in mind that interest rates on second mortgages are often times much higher than first mortgages, since banks assume more risk.

The Drawbacks of Jumbo Mortgages

While there are many benefits to jumbo mortgages, there are some things you’ll want to keep in mind as you’re evaluating various loan options:

• The down payment and interest rates for these types of loans has decreased in recent years, but interest rates are still higher than those of conventional mortgage rates.
• The risky nature of the loans makes them subject to stricter application requirements. You also require a substantial amount of reserves and proof of the same to pass through underwriting.
• You must have a minimum credit score of 700 to qualify for a jumbo mortgage.
• You can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) of indebtedness. However, higher limitations ($1 million ($500,000 if married filing separately) apply if you are deducting mortgage interest from indebtedness incurred before December 16, 2017.

Key Takeaways

If you’re planning on buying a new home with a property value that doesn’t fall under the limit for conventional financing, then a jumbo loan may potentially be your best option, provided you can qualify for one. Just keep in mind that the application process is stricter, so you’ll want to have all your ducks in a row prior to applying.

Before you begin the home buying process, contact the mortgage experts at Embrace Home Loans®. We have over 35 years of experience, and will be happy to explore all of the mortgage financing options that are available to you, so that you have the perfect mortgage to help you buy the perfect home of your dreams.