Financial Education

Jumbo loan: what it is and how to get one

Are Jumbo loans the right option for you? Read on and find out. Learn what jumbo loans are and the minimum requirements. Take the money you need for a large property purchase.

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Get the home you want with a jumbo loan

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Find out everything about jumbo loans! Source: Canva

If you’re considering buying a home, you might have come across the term Jumbo Loan! But what is a jumbo loan? How to take one? We are here to answer all these questions!

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Then keep reading and learn more about this type of home loan and if it’s the right choice for you! Let’s get started!

What is a jumbo loan and how does it work?

A jumbo loan is a type of mortgage used to finance properties that exceed the limits set by the Federal Housing Financing Agency (FHFA).

Simply put, a jumbo mortgage allows homebuyers to borrow larger-than-normal amounts.

Therefore, these mortgages were designed to finance luxury properties in more expensive areas.

It can be used for primary homes, investment, and vacation properties.

Jumbo loans often have more strict requirements for new borrowers, varying depending on the lender and location.

The Jumbo Loan market is smaller than the market for a conventional loan. As a result, you’ll need to research before choosing a lender.

These non-conforming conventional loans involve more credit risks since more money is involved in the transactions, and Freddie Mac or Fannie Mae does not guarantee them.

So the question is, are you prepared to take a jumbo loan? Let’s take a look in more detail to help you decide!

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Loan limits

As previously said, jumbo loans allow homebuyers to borrow more than the loan limit in a set area. In most U.S. states, the conforming loan limit is $647,200.

However, this limit can vary depending on the location. For example, in higher-cost areas such as the Northeast and the West Coast, the conforming limit is $970,800.

This limit can expand even more in other places. So remember to check the conforming loan limit in the specific area you intend to purchase a home.

Credit score

Since jumbo loans have higher loan amounts available, the credit score requirements are higher. You’ll need an excellent credit score to qualify for this home loan.

The average requirement is 700. But depending on the lender, you might qualify with as low as 660.

Fees and rates

Jumbo loans used to have higher interest rates than conventional mortgages. However, this annual percentage rate difference is decreasing over time.

Currently, the average APR for a 30-year jumbo loan is 5.610%. When it comes to fees, borrowers must expect higher costs than they would with conventional loans.

Is it worth applying for a jumbo loan?

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Find out if it is worth it applying for a jumbo loan! Source: Freepik

Jumbo loans are an investment! They can help you finance a large home purchase without being limited by the conforming mortgage limits, so it is worth checking out!

However, some drawbacks must be considered before making your decision! Let’s take a look!

Benefits

  • Jumbo loans let you borrow larger amounts;
  • This type of home loan offers competitive interest rates;
  • It allows you to buy a larger home.

Risks

  • It requires a higher credit score from applicants;
  • Potential borrowers must have a larger annual income;
  • Borrowers must have enough cash to cover six to 12 monthly payments.

How to apply for a jumbo loan?

Applying for a jumbo loan is simple. Most lenders offer the convenience of an online application process. Homebuyers can even prequalify without damaging their credit scores.

So after shopping around for a lender and finding one that best fits your needs, you must fill out the application form.

You’ll need to provide basic information, including full name, home address, phone number, email address, and Social Security number.

You’ll have to fill out your income and employment information.

Furthermore, you’ll see the offers you qualify for and choose the one that best fits your current need.

In most cases, borrowers can even submit documentation and sign paperwork online.

As previously said, jumbo loans involve more risks than a conventional conforming home loan. Therefore, there are some minimum requirements borrowers must meet to get approved.

Below, let’s check what these minimum borrowing requirements are!

Requirements

The minimum borrowing requirements might vary from lender to lender. But there are some common guidelines potential homebuyers must meet.

Jumbo loans usually have larger income requirements. As a result, borrowers will need a lower debt-to-income (DTI) ratio.

Lenders require borrowers to have a DTI under 43%, but the lower, the better.

Also, to qualify for a jumbo loan, borrowers must have a good credit score. The average requirement is a 700 credit score; however, in some cases, you can still qualify with 660.

Furthermore, jumbo loans require a higher down payment of 10% to 20% of the property value.

Also, lenders will request borrowers to have enough funds to cover 6 to 12 months of mortgage payments.

Is a jumbo loan the best option for you?

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Discover if a jumbo loan is a right option for you! Source: Freepik

The answers to this question will depend on multiple factors, including your situation and finances.

Since this type of home loan is destined for purchasing expensive homes, you’ll need to research before making your decision!

Start by checking the conforming limits in the area you intend to make the purchase.

Therefore if the home you want to doesn’t fit the conforming loan guidelines, you might need a jumbo loan to make that purchase.

Furthermore, remember that jumbo loans are designed for borrowers with considerable income and resources. So you must ensure you have enough funds to pay it back. 

Otherwise, you’ll end up making a huge debt and causing financial damage. And that’s the last thing you want.

Now that you know all the details about jumbo loans, it’s time to work.

To help with your homebuying journey, in the following article, we’ll teach you how your credit score can impact your mortgage rate. 

Plus, we’ll give you the best tips to improve it. This way, you can qualify easily for a home loan! So let’s get started!

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About the author  /  Beatriz Vieira

Beatriz Vieira is a producer and copywriter who is part of the finance writer team in this portal. She has a degree in Journalism and aims to improve her bilingual writing skills. Her subjects of most significant interest are culture, finances, and self-development.

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