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The Homebuyer’s Guide to Jumbo Loans

02/27/2018 Kristin Demshki


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So you have your eye on a new home, but the loan you need is bigger than the conforming loan limit—what are your options?

A jumbo loan can be a great fit for homebuyers who are in a strong financial position and want to secure a large loan. Learn more about jumbo mortgages and decide whether or not it’s the right type of loan for you.

What is a Jumbo Loan?

A jumbo loan is a non-conforming mortgage that is used to buy a higher-priced home. Potential homebuyers typically need to be in a strong financial situation—that is, with a high credit score, low debt-to-income ratio, and plenty of cash reserves—to secure a jumbo loan.

A jumbo mortgage is considered non-conforming because the loan amount exceeds the limit for a conforming mortgage (i.e. loans that conform to Fannie Mae and Freddie Mac standards). The 2018 limit on conforming loans is $453,100 in most parts of the country, but in high-cost areas this limit can be as high as $721,000. If the loan you are seeking is higher than the limit in your area (and you meet other financial requirements), you may want to pursue a jumbo loan.

A jumbo loan is larger, which means taking on a larger financial burden. Jumbo mortgages cannot be handled by Fannie Mae or Freddie Mac, the two government-chartered lenders, so the loan will be kept on the lender’s own books or transferred to another entity.

Lenders set their own underwriting guidelines for jumbo loans, so eligibility requirements may vary among lenders. Make sure to get as much information as you can from each lender to understand the lender’s specific requirements and underwriting procedures for jumbo loans.

Jumbo Loans vs. Conforming Loans

Jumbo loans differ from conforming loans in several important ways. Keep in mind that these variations will depend on the specific lender and the jumbo loan program they offer.

The Down Payment

Down payment requirements for jumbo loans are often stricter than with conforming mortgages. Many homebuyers will be required to make the typical 20 percent down payment for a jumbo loan, but this varies among lenders. Some lenders may have a minimum down payment of 15, 20 or even 30 percent for a jumbo loan.

For those who want to make a smaller down payment, some lenders are willing to offer loans with down payments as low as 10 percent, or even five percent. However, these lenders still want to ensure you are in a strong financial position to pay off the loan, so it may come with a trade-off—such as a higher interest rate—to offset the smaller down payment. Talk with your lender for more specifics on negotiating your down payment.

Credit Score

Similar to down payments, credit requirements are higher for jumbo loans than for conforming loans. To secure a jumbo mortgage, most lenders require a strong credit score. Some lenders will approve borrowers in the 680-700 range, while others have a minimum credit score of 720. The lender may also take a closer look at your payment and credit history, including the number of current or former lines of credit in your credit history.

Depending on your situation, the lender may also want to see mortgage statements or rental records from the past few years to verify your ability to make payments and manage your funds.

Income Level

Jumbo loans are often attractive to homebuyers with more (or more complex) sources of income. With that in mind, it’s common for jumbo loans to require more paperwork and income documentation than conventional loans. Self-employed buyers, for example, may be required to provide multiple years’ worth of tax returns, rather than just one year, to verify ongoing income.

Lenders may also require a stronger debt-to-income ratio to secure a jumbo mortgage. Many lenders require a debt-to-income ratio in the 38-43% range, meaning your monthly mortgage payment can’t be more than 43% of your pretax income.

Interest Rates

Historically, interest rates for jumbo mortgages were usually higher than conforming mortgages, but this isn’t necessarily the case anymore, as interest rates for jumbo loans are usually comparable to—and sometimes a little better than—conforming loans.

Cash Reserves

For a conforming mortgage, lenders want to see that you have a few months’ worth of mortgage payments set aside (i.e. “in reserve”). Given the size of jumbo loans, lenders may ask to see 6-12 months’ worth of mortgage payments in reserve. Requirements may vary among lenders, but many lenders want to see half of these reserves liquid (checking or savings), and the other half can come from retirement assets.

Eligible Homes

There are more stringent restrictions on property eligibility for jumbo loans as compared to conforming loans. Some lenders will only offer jumbo mortgages for the buyer’s primary residence, but others will allow jumbo mortgages for second homes. Some lenders will not write a jumbo loan for a short sale or a foreclosed home, and some have specific requirements for condominiums vs. houses. When it comes to eligibility requirements, check with your lender for more specific information before you apply.

Is a Jumbo Mortgage Right For You?

Jumbo loans are usually geared toward high-income earners who have good credit and plentiful assets. Due to the size of the loan, as well as the lack of government insurance, lenders assume greater risk with these mortgages.

A jumbo mortgage may be right for you if:

  1. You finances are strong and healthy.
  2. You wish to buy a higher-priced home.
  3. You’re ready to take on a substantial, long-term financial commitment.

For more information about jumbo loans from PennyMac, call a PennyMac loan officer today.