If you’re in the market for a pricier home, then you may need a jumbo loan.
The good news is that jumbo loans can help you get a mortgage that’s too large to be backed by the federal government. However, because these loans aren’t insured, they pose a higher risk to the lender. That means jumbo loans often come with stricter eligibility requirements.
If you think you might need a jumbo loan but aren’t sure how to get one — we’ve got your back. Here’s what you should know about how to get a jumbo loan, and how the approval process works.
What Is a Jumbo Loan?
A jumbo loan exceeds the limits set each year by the Federal Housing Finance Agency.
For 2022, the loan limit for a one-unit property like a single-family home is $647,200. There’s a higher limit of $970,800 for counties where 115% of the local median home value exceeds the standard limit. This higher limit also applies in Alaska, Hawaii, Guam, and the U.S. Virgin Islands. You can use this map of loan limit values by county to look up which counties have the higher limit.
Lenders can sell loans that conform to these limits to Fannie Mae or Freddie Mac. These government-sponsored enterprises buy conforming mortgages so lenders have more money to make more loans.
Loans that exceed these limits are called jumbo loans. Because jumbo loans can’t be sold to Fannie or Freddie, they pose a higher risk to the lender.
Jumbo Loan Requirements
Though each lender sets its own jumbo mortgage loan requirements, there are some general criteria you’ll likely need to meet to get one. Here’s how to qualify for a jumbo loan.
Specific credit requirements vary by lender. As a general rule, a jumbo loan requires a higher minimum credit score than a conforming loan.
So, how good does your credit score need to be to get a jumbo loan? Your lender may require a minimum credit score between 680 and 760, compared to about 620 for a fixed-rate conforming loan.
Lenders use your DTI ratio to help determine if you can afford to pay back a loan. Your DTI ratio compares your income to how much debt you have. To calculate your DTI ratio, add up your monthly debt payments and divide the total by your gross monthly income, which is how much you make before taxes and other deductions are taken out.
In general, a lower DTI ratio shows lenders that you have room in your budget to afford the monthly mortgage payment. For a jumbo loan, lenders may require your DTI ratio to be no higher than 43% to 45%, though that number could be lower depending on the lender you’re working with.
Cash reserves are how much money you have that’s not needed for your down payment and closing costs. Your lender is going to want to make sure you have enough cash in the bank to cover the first six to 12 months of mortgage payments.
If you need a jumbo loan, lenders typically expect you to make a larger down payment than you would need for a conforming loan. You’ll likely have to make a down payment of at least 10% to get approved for a jumbo loan, and it’s common for lenders to require a down payment that’s at least 20% to 30% of the home purchase price.
Jumbo Loan Qualification Process
If you think you’re in the right financial shape to take on a jumbo loan, then you’ll find that the process is similar to applying for a conforming loan. Take a look at some of the steps.
Some lenders require a second home appraisal for a jumbo loan to confirm that the loan amount matches the home’s value. This tends to be the case when the loan amount is especially high, and the lender wants to be sure that the house is worth it.
Your LTV ratio compares the loan amount with the assessed value of the home, again to confirm that the value justifies the loan amount. Calculate your LTV ratio by taking the loan amount and dividing it by the value of the house. Lenders typically require an LTV ratio of less than 90%, though that upper limit could be lower depending on the lender and your financial situation.
To review your finances and assess whether you can afford the loan, your lender is going to require specific documentation. You should be ready to provide the following:
- W-2 forms from the last two years.
- Pay stubs from the last 30 days.
- Tax returns for the last two years.
- Bank statements from the last two months.
- Proof of any additional income.
- Profit and loss statements and balance sheets if you’re self-employed.
Jumbo Loan Costs and Fees
A jumbo loan typically is more expensive than a conforming loan. Not only is a jumbo loan a larger sum of money, but it also comes with higher closing costs. However, even though jumbo loans are riskier for lenders, your interest rate won’t necessarily be higher than it would be with a conforming loan.
Is a Jumbo Mortgage Right for You?
Jumbo mortgages come with trade-offs, but they make sense for folks who can afford to buy a more expensive home. Homebuyers who have the money to cover higher monthly payments and increased closing costs may find that a jumbo mortgage is the best fit for their financial situation and needs.