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3 Things to Know About a Jumbo Loan

March 13, 2020

3 MINUTE READ

3 Things to Know About Jumbo Loans

If you’re in the market for a home that costs more than $500,000, you may need a jumbo loan. But do you know what that really means? For instance, did you know that jumbo loans have stricter qualifications than a traditional mortgage? 

Read on to find out 3 things you need to know about jumbo loans. 

What is a Jumbo Loan? 

Simply put, a jumbo loan is a type of mortgage that is used to finance a home that is too expensive for a traditional conforming loan. In most places, the maximum amount for a traditional mortgage loan is $510,400, as set by the FHFA, or the Federal Housing Finance Agency. Houses that exceed this specific local limit will require a jumbo loan. 

Aptly named, jumbo loans are also known as non-conforming conventional mortgages, and they are considered to be a riskier investment for lenders because these types of loans aren’t guaranteed by Fannie Mae and Freddie Mac. In other words, if you default on your mortgage loan, there is no protection built-in for your lender. 

As with traditional conforming loans, there are jumbo loans that are available with either a fixed interest rate or an adjustable rate, and different loans will come with a variety of different terms and conditions. 

How to Qualify for a Jumbo Loan

Since these loans are considered a riskier move for lenders and because the loans are larger, the underwriting criteria for jumbo loans tend to be stricter regarding the following factors:

  • Credit score. Often, to qualify for a jumbo loan, lenders will require you to have a strong credit score, usually higher than 700. Sometimes, lenders require a credit score higher than 720 to qualify for these types of products. 
  • Debt to income ratio. In addition to your credit score, lenders will also look at your debt to income ratio or your DTI. Lenders want to make sure that you don’t become over-leveraged in your finances — and default on your loan. While some lenders are willing to be more flexible if you can demonstrate substantial cash reserves, most lenders have a cap for the DTI they will accept. 
  • Cash reserves. Not surprisingly, you’re more likely to qualify for a jumbo loan if you can show that you have a significant amount of cash in the bank. Don’t be surprised if your lender asks you to prove that you have enough cash to cover one year of your mortgage payments before approving you for a jumbo loan.
  • Appraisals. When you’re planning to make such a substantial purchase, some lenders may require more than one appraisal of the property. 

What are the Benefits of a Jumbo Loan? 

The biggest benefit of a jumbo loan is that it allows borrowers the opportunity to go beyond the limitations of Fannie and Freddie when shopping for a home. In other words, you can still receive a competitive interest rate and finance your dream home, without the limitations that are imposed with traditional conforming mortgages. 

Jumbo loans are also a convenient option for financing a property. Rather than taking out two conforming loans to purchase a property, you can take out one jumbo loan. And lastly, many borrowers prefer to finance a more substantial portion of the home’s cost rather than tying up their cash, making this type of loan an especially helpful tool in financing. 

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