Homeownership is often considered a pillar of the American dream. While you can certainly accomplish plenty in life while renting your living space, buying a home is more of an investment in the future.
However, financing a home purchase can be intimidating. Most people are unable to afford the upfront costs of a home, and they are forced to take out home loans to achieve their dream of homeownership.
The key to financing your home is finding the right home loan product for your needs. If you have a lower income or a poor credit score, then you may need to consider government-backed loans like an FHA loan or USDA loan. Many homeowners will opt for a conforming conventional mortgage loan.
However, if you want to purchase a more expensive home, then your only option may be a jumbo loan. What is a jumbo loan and why does it matter? Let’s dive into this subject.
What is considered a jumbo loan?
A jumbo loan is defined as a non-conforming conventional loan. What does that all mean? A conventional loan is a mortgage that is not backed by a government entity, such as the Department of Veterans Affairs of the Federal Housing Administration. However, these types of loans can be further categorized into conforming and non-conforming.
Conforming loans are backed by the two primary real estate organizations in the US, known as Fannie Mae and Freddie Mac. However, they will only buy mortgages in the secondary housing market up to a certain limit.
Once you go past the price point, which is set by Fannie Mae and Freddie Mac, you have a non-conforming loan. This is known as a jumbo loan because it is a larger amount of money than conventional conforming loans.
The jumbo loan limit varies from market to market, but it has been set at $766,550 for most areas in 2024. If you plan to purchase a home above that number or the specific limit in your location, then you will need to take out a jumbo loan.
Jumbo loan requirements
Since the risk is high to the lender because of the large amount of money being borrowed, jumbo loan requirements tend to be much more strict than conforming loans.
Here are a few of the requirements that you may have to meet to qualify for a jumbo loan, though there could be some relevant factors that affect these standards between different markets:
- A credit score minimum of 700
- A debt-to-income ratio of 36% or lower
- Significant cash reserves
- A down payment of at least 20%
These requirements can vary from lender to lender, but you can expect strict standards for jumbo loans to mitigate the risk they take on by lending this amount of money to a borrower.
When does a jumbo loan make sense?
You might be thinking that you have no intention of buying a house that is that expensive. However, there are plenty of situations where it may be necessary to pay that much for a home.
You might be moving to a particularly expensive area, and even with higher limits set by Fannie Mae and Freddie Mac, many of the houses there could fall outside the limit.
Perhaps you have a pretty large family and need a lot of bedrooms and bathrooms, so the type of home you need costs more than the limit. Maybe you want to start an online business, and you need enough room for a solid home office, in which case you may be paying more for a larger home.
If you have animals to take care of, then a big property is necessary. There are many reasons why a conforming loan may not be enough for your house, so a jumbo loan becomes your only option.
Being approved for a jumbo joan
With strict requirements in place, it is not as easy to be approved for a jumbo loan as it is for other types of mortgage products. You will need to provide proof of income to demonstrate that you can afford this loan, which could include tax returns, payment stubs, bank records, profit/loss statements, and even proof of additional income.
A more intense appraisal of the property will also be required, and some lenders may even insist on two appraisals. You will also be dealing with a higher interest rate in all likelihood.
Is a jumbo loan right for you?
Now that you understand what a jumbo loan is and when it should be used, you can make a smart decision when financing your home purchase. Due to the higher standards and costs associated with a jumbo loan, they can be risky for both borrowers and lenders. However, if you want to buy a more expensive property, then this may be your only way to do so.
