Jumbo Loans Explained: Key Insights for Homebuyers

Conventional mortgages are the ones that most people think about when they’re ready to buy a home. But what if the home is too expensive? The FHFA limits the amount of money that can be loaned through a conventional loan, based on the housing prices in the area, so there are homes that may be too expensive to purchase with a conventional loan. That’s where a jumbo loan can help.
Is a Jumbo Loan the Right Option?
Prospective buyers who want to purchase a more expensive home may want to consider a jumbo loan so they can be approved for a higher mortgage. This is a higher-risk loan because it’s not guaranteed, so they often do have more strict requirements compared to conventional loans. However, in many cases, they can be a good option. Buyers will want to start by learning more about Jumbo Loans to see if this is the right option for them.
Types of Jumbo Loans Available
There are different types of jumbo loans available, depending on the buyer’s preferences and needs. Most buyers will opt for a 30-year mortgage, but there are shorter ones available, too. They are also available with a fixed rate or as a variable rate mortgage. Borrowers will want to make sure they consider which of these options is best for their current needs and finances before applying.
Requirements for a Jumbo Loan
It is crucial for prospective buyers to understand the requirements for a jumbo loan. Since these loans are a higher risk for the lender, they do have more strict requirements than a conventional mortgage.
- Down Payment – Higher down payments are common with jumbo loans, so buyers will need to have more money ready to use. Though down payments start at 10%, they can be 20% or higher, depending on the loan.
- Credit Score – Higher credit scores are needed to qualify for a jumbo loan. Most lenders will want to see a credit score of at least 700, though some may require 760 or higher.
- Debt-to-Income Ratio – Buyers will need to have a low debt-to-income ratio to qualify for a jumbo loan. However, a higher amount of debt is possible if the buyer has enough cash reserves when they purchase the home. In most cases, though, the ratio is capped at 43%.
- Cash Reserves – Lenders will likely be more willing to approve the jumbo loan if the buyer can show they have at least one year’s worth of mortgage payments in the bank when they apply for the mortgage. This isn’t a strict requirement, but more cash on hand means it’s easier to be approved.
- Appraisals – Appraisals from more than one expert may be needed to ensure the home is worth the asking price. While one appraisal is typical with a conventional loan, lenders may require two or more before they approve a jumbo loan.
If you’re getting ready to purchase a home, but it is too expensive for a conventional loan, it may be a good idea to look into jumbo loans. Talk to a lender today to learn more about your options and determine if this is a good choice for your needs. They’ll help you make sure everything is ready to go so you can start shopping for a new home.