What Is a Jumbo Home Loan or Jumbo Mortgage?

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Americans love big things. Big cars, big meals, big bags of money -- and, for many in hot real estate markets, great big mortgages. Maybe you don’t really love that great big mortgage, but if you’re going to buy a house, it could be your only option. 

That’s why you’re here, you’re looking for more information about jumbo mortgages, right?

Jumbo Home Loans: The Basics

A jumbo home loan, or jumbo mortgage, is a type of non-conforming conventional loan. This means it’s a loan that isn’t backed by FHA, it has nothing to do with VA or USDA, and neither Fannie Mae nor Freddie Mac will buy it.

It makes a person wonder why a bank would even deal in these, but the truth is that they’re reasonably low risk and very high profit from the lender's perspective. As the name suggests, jumbo loans are for larger amounts of money than a traditional mortgage — in the $450,000 range and up.

Banks that do deal in jumbos typically treat them as “shelf” or portfolio loans, which are loans that are kept and serviced in-house rather than sold. This gives the bank itself the ultimate in deciding power when it comes to terms and qualifications. It also gives borrowers a huge range of options when it comes to products. Unlike more traditional mortgages, where shopping around may not yield much for you, jumbos can have very different terms from bank to bank. That’s great for you if you need one.

Jumbo loans have one other very well-defined characteristic in common: they exceed the loan limits for conforming loans.

What are conforming loan limits?

Just to recap, the conforming loan limit is a limit set by government-sponsored loan insurers Fannie Mae and Freddie Mac. If a loan goes above these amounts, they will not purchase it. Right now, in most of the United States, the conforming loan limit is $453,100.

Despite that, there are a variety of high-cost areas, such as many parts of New York City, Hawaii, Alaska, and Los Angeles, which have higher limits. For example, the conforming loan limit in Los Angeles is $679,650, while the conforming loan limit in Honolulu is $721,050. 

How do you qualify for a jumbo loan?

If you want to buy a particularly expensive home—one above the conforming loan limits in the state and county where you’re buying—you’ll likely need a jumbo loan. While jumbo loans can allow you to purchase a bigger and better home, they can also be more difficult to qualify for.

Jumbo mortgage qualification is similar to that of a conventional loan. You have to prove you have the intention of paying the loan back, as well as the ability to do so. Typically, you’re going to see these main differences between conventional loans and jumbos, however, keep in mind:

  • Higher credit score requirements. Most banks will want to see a credit score of at least 700 to loan you a million bucks. Others want more (upwards or beyond 740 isn’t uncommon) so be sure your credit score is as high as possible.

  • Larger down payments needed. You can get almost any sort of borrower-occupied residential mortgage with no more than five percent down these days. However, when it comes to jumbos, you’ve found a low down payment requirement if the bank only asks for 10. Not that long ago, as much as 30 percent was the norm, not the exception. Many buyers opt for a jumbo loan with 15 down.

  • No private mortgage insurance. The down payment on a jumbo may be harsh, but there’s often no mortgage insurance due, since many of banks that make these loans keep them to themselves. They don’t need to prove to a secondary market buyer that you’re not a risk for default; they already believe it.

  • Flexibility on income sources. Because the type of people who tend to borrow using a jumbo are a very heterogeneous group, ranging from everyday people in extremely costly areas to day traders, rock stars, and celebrities. Therefore, banks are used to dealing with more complicated work histories. If you have a business or are the sort of person who works as an entertainer or are paid by appearances, a jumbo may be easier to qualify for than a conventional mortgage.

  • Double the appraisals, double the fun. One quirk of many jumbos is that they frequently require two appraisals prior to closing. This is because the bank wants to be completely sure that they’re not making a mistake and giving you way too much money for your house. So, as long as appraisal number one and appraisal number two are roughly similar, you’re gold. You still have to pay for them both, though.

What are jumbo loan eligibility requirements?

Since a lender is taking significantly more risk by offering you a home loan above the limits set by Fannie Mae and Freddie Mac, they’ll want to feel confident that you’ll be able to pay back the loan without any issues. To compensate for that risk, they’ll likely want a home buyer to:

  • Provide a down payment between 10 – 20%

  • Provide detailed income documentation

  • Consider taking on an adjustable-rate mortgage (since it may be easier to get than a fixed-rate jumbo loan)

  • Have a mortgage payment that’s no more than 38 – 45% of your monthly pre-tax income (depending on the lender and loan amount)

  • Have a very good or excellent credit score, usually 700 or above (though some lenders may go as low as 660)

  • Have an emergency cash fund of at least 10% of the loan amount in a bank or brokerage account

What is an FHA jumbo loan?

Just like private lenders, the Federal Housing Administration offers FHA jumbo loans for qualified borrowers. Much like regular FHA loans, FHA jumbo loans usually have significantly lower down payment requirements than their private counterparts. However, if you take out an FHA loan (jumbo or otherwise) with a less than 20% down payment, you’ll have to pay for mortgage insurance.

The duration and rate of your mortgage insurance payments will depend on both the size of the loan and your loan-to-value ratio (LTV), i.e., the mortgage amount divided by the appraised value of the property. Additionally, if your loan is more than $625,000, which is considered a jumbo loan in the vast majority of counties across the country, you’ll likely have to pay a higher mortgage insurance rate.

What is a jumbo adjustable rate mortgage loan?

An ARM jumbo loan is an adjustable rate mortgage that exceeds the Fannie Mae and Freddie Mac loan-servicing limits. For most American counties, this amount is $453,100. For more expensive areas, that limit can go as high as $679,650. Recently, ARM jumbo loans have become incredibly popular—with statistics suggesting that around 75% of ARMs currently issued are for jumbo loans. Of that 75%, nearly half (47%) of those home loans are for more than $1 million.

Is it a good idea for me to get an ARM jumbo loan?

That depends. Most people looking to get an ARM jumbo loan want to get a really nice house, but they don’t want to deal with a high mortgage payment right now. Otherwise, they’d probably get a more traditional 30-year fixed rate mortgage.

To determine if an ARM jumbo loan is right for you, it’s smart to take a look at why you are trying to avoid that higher mortgage payment. If it’s because you can’t afford the purchase price at the moment, will you be able to pay up when the fixed interest rate period of the mortgage ends and prices likely increase?

In the end, if you’re considering an ARM jumbo loan, make sure you can afford the payments during the later years of the mortgage when you’ll have higher interest rates. Since you’ll be dealing with an even higher payment than someone with a conventional mortgage, you’ll want to make sure you have the income (and the savings) to handle large fluctuations in your mortgage rate.

What if I can’t qualify for a jumbo loan?

If you can’t seem to qualify for a jumbo loan, but still want to purchase a home with a loan outside the conforming limit for your area, a piggyback loan like an 80-10-10 could be the right choice for you.

In an 80-10-10 loan, a borrower typically takes out a traditional, conforming loan for 80% of the home’s price, a second mortgage (usually a HELOC) for 10% of the price of the home, and pays the 10% of the home’s price as a down payment. That additional 10% can easily help you get around conforming loan limits—as long as you don’t want a loan that significantly exceeds them.

Are there alternatives to a jumbo loan?

If you aren’t certain that you’ll be able to meet the requirements for a jumbo, there’s another option. In banking circles, these are frequently referred to as piggyback loans. One example of a piggyback loan is where a lender makes an 80 percent conventional conforming loan as a first mortgage, and then also loans you a 10 to 15 percent second mortgage simultaneously.

Having multiple loans can be a heavy financial burden to carry if things go wrong for you, so be sure you want this before you try it. Some people like this configuration because it eliminates the need for mortgage insurance, though the second mortgage is often at a higher rate (sometimes even an adjustable rate) and a shorter term than the first.

How much down payment is required for a jumbo loan?

A 20% down payment (the standard for conventional loans) is often required for a jumbo loan. However, this isn’t always the case. Some borrowers may be able to obtain loans with down payments as low as 10 – 15%. Despite that, these low down payment jumbo loans may be even stricter in regards to credit score requirements, income documentation, cash reserves, and debt/income ratio. As always, lenders want to make sure you have a good chance of making all your payments before they take the risk of loaning you hundreds of thousands—or millions—of dollars.

How does each state define a jumbo loan?

A jumbo home loan is a loan that exceeds a specific amount, called the conforming loan limit. The conforming loan limit is actually calculated by county, not by state. So, depending on where exactly you live, you could face a different conforming loan limit. For most U.S. counties, the 2018 limit is set at $453,100, a nice increase from 2017’s $424,100. For particularly high-priced areas, including some parts of Hawaii, the loan limit can reach $679,650.

These limit prices aren’t arbitrary. Instead, they’re calculated based off of the home prices in the area. For example, the average home price in Baton Rouge, Louisiana, comes in at $169,900, while the average home price in Los Angeles clocks in at $570,000. So, the higher the average home price in any particular area, the higher the conforming loan limit will usually be. Therefore, you can take out a larger loan in higher-price areas without it going to into jumbo loan territory.

Are jumbo loan rates increasing or decreasing in recent years?

While jumbo loan rates used to be significantly higher than their conventional counterparts, the rate difference between these two products has fallen significantly in the last few years. After the financial crisis, lenders trying to reduce risk bumped up jumbo interest rates in order to protect themselves, but now that the market seems to have stabilized, they’ve decided to make jumbo loans more accessible in hopes of increasing their profits.

This also means that fixed rate jumbo loans, which were once quite uncommon, are growing in popularity, and might not be much harder to get than their adjustable-rate counterparts.

Do You Pay PMI on a Jumbo Loan?

In the vast majority of cases, you won't need to pay any PMI on jumbo loans. Typically, if you’re approved for a jumbo loan, you’ll already have to pay a 20% down payment, and your lender will already have verified your income as well as checked your credit score. This process improves a lender’s confidence that you’re a low risk borrower-- meaning there is less of a need to insure the loan.

Wanna talk about big things like giant mortgage loans? We’re happy to help you sort through your mega-huge options! Just drop us a line at Home.Loans, we’re here, just waiting for you. Call us soon and we’ll let you in on our office pool: when do you think the copy machine toner’s going to run out? Stay tuned!

Can I refinance a fixed-rate loan into a jumbo ARM?

Yes. In some situations, people dealing with a high interest rate fixed jumbo loan want to take a step to reduce their monthly mortgage payments, and a jumbo ARM can help them do this. But, refinancing into a jumbo ARM has risks, so it’s usually best for those who are planning to sell their home in a few years (before the fixed-rate period ends), or those who are confident their income will increase significantly in the next few years.

Can I refinance an ARM jumbo loan into a fixed-rate loan?

Yes. Just like other ARM loans, many home buyers like to refinance into a safer, fixed-rate loan during the fixed-rate period of their ARM—before they have to worry about increasing interest rates. If this sounds like you, keep in mind that there’s no guarantee you’ll be able to refinance. If you’re serious about refinancing your ARM jumbo loan, you should have good credit, a decent amount of savings, and make sure that you’re current on all your mortgage payments.

Fortunately, most jumbo ARM borrowers currently have great credit—which is pretty much a must if you’re considering getting a ARM jumbo loan. Otherwise, you could get stuck in a situation that’s particularly hard to get out of.

Does it pay to shop around for a Jumbo ARM?

It really does. Unlike conventional ARMs or fixed-rate mortgages, jumbo ARMs are more of a niche market—and that means that interest rates can fluctuate a lot between lender to lender. So, the more you shop around, the better rate you might be able to get.

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