One of the most important steps in shopping for a home is identifying the type of mortgage that you qualify for and is best for you.  But, if you live in an area where home prices are crazy high, then you may not qualify for the conforming loan limits.  You may in fact need a jumbo home loan.  It’s important to understand the ins and outs of a jumbo loan.

Let’s begin with the basics, what is a jumbo loan?

A jumbo loan, or jumbo mortgage is a mortgage loan that exceeds the limit set by the Federal Housing Authority Agency, otherwise known as FHFA.  Jumbo loans cannot be secured by the government-sponsored Fannie Mae and Freddie Mac, which makes them riskier loans for lenders. Fannie and Freddie set limits on how high the mortgage can be that they will purchase on the secondary market with their conforming loan limits.  Each year this loan limit is set.  The loan limits for 2023 is $726,200* they change yearly so check https://singlefamily.fanniemae.com/originating-underwriting/loan-limits.  So, anything above that would be considered a jumbo loan. Anything below that is a conforming loan.

Now, of course, you can get a little bit more complicated than that because there are several areas across the country like in California, Hawaii and Washington, that have what is called high balanced loan limits in high-cost areas where there's an interim level where you could choose to go conforming or jumbo. But let's just keep it simple and essentially anything above $726,200 is a jumbo loan.

Like conventional mortgages, you can get a jumbo loan in a variety of terms or repayment schedules and they can be fixed or adjustable-rate loans.  However, jumbo loans work differently than conventional mortgages because they have stricter requirements than other types of mortgages and you’ll have to meet specific property types, down payment requirements, credit scores and debt-to-income ratio requirements.

Let’s talk about down payment and how much down payment do you need to qualify.  In general, jumbo mortgages require more down payment than a conforming loan.  It’s common to see lenders require 20% down on jumbo loans for a single-family home. They also require higher credit scores, lower debt-to-income ratios, and then generally the lender wants to see reserves, which is money left after closing.  Reserves are required to show that you've got a couple months of payments left in the bank.

Your credit score is a major factor when it comes to getting a jumbo mortgage.  You’ll usually need a credit score of at least 700 to get a jumbo loan for one million dollars and a 720 for jumbo loans between one million and one and a half million.  If you are going over 1.5 million, you will probably need a 740.

Your debt-to-income ratio is also a factor.  You’ll need a debt-to-income ratio between 40-45% in order to qualify on most jumbo programs.  This is lower than the industry standard of 50% DTI.

When it comes to jumbo loans, the interest rates are typically higher than the standard conventional and they have stricter qualifying guidelines.  Whatever loan you are getting there are always closing costs which can range between 3% to 6% of your total home value.  This can add up for a jumbo loan, so you want to be prepared to cover your closing costs in addition to your down payment.

Jumbo loan qualifications typically are more stringent than with conforming loans.  Your lender will want to see up to two years of W-2’s, tax returns and 1099’s.

The bottom line is that jumbo loans are out there, but you will need to be prepared to have more money down, have great credit and reserves and be prepared to share more income documentation.  It’s important to consider every requirement before you get a jumbo loan, but once you’re ready to go, make sure you are working with a licensed mortgage lender who can help you navigate through all the details and into your dream home.