What Is a Jumbo Loan?
A Jumbo mortgage loan is a type of mortgage that exceeds the limits set by the Federal Housing Finance Agency. Unlike Conventional mortgages, a Jumbo loan is not eligible to be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac.
Jumbo loans are primarily designed to finance properties in high cost areas, such as California, jumbo mortgages come with unique underwriting requirements and tax implications.
The value of a jumbo mortgage varies by state—and even county. The FHFA sets the conforming loan limit size for different areas on an annual basis. That amount may actually be even higher in counties that have higher home values.
KEY TAKEAWAYS
- A Jumbo loan is a type of financing that exceeds the limits set by the Federal Housing Finance Agency
- Homeowners must undergo more rigorous credit requirements than those applying for a conventional loan
- Approval requires a stellar credit score and a very low debt-to-income ratio
- The average APR for a jumbo mortgage is often at par with conventional mortgages
How a Jumbo Loan Works
Just like traditional mortgages, minimum requirements for a Jumbo have become stringent since 2008. To get approved for a Jumbo mortgage loan, you will need a stellar credit score—700 or above—and a very low overall debt-to-income (DTI) ratio. This ratio should be under 45%.
As an alternative to non-traditional mortgages, Jumbo mortgage loans still must fall within the guidelines of what the Consumer Financial Protection Bureau considers a “qualified mortgage”—a lending system with standardized terms and rules, such as the 45% DTI.
You’ll need to prove you have accessible cash on hand to cover your payments.
Specific income levels and reserves depend on the size of the overall loan, but all borrowers need 30 days of pay stubs and W2 tax forms stretching back two years.
If you’re self-employed, the income requirements are greater: Two years of tax returns and at least 60 days of current bank statements. The borrower also needs provable liquid assets to qualify and cash reserves equal to six months of the mortgage payments. And all applicants have to show proper documentation on all other loans held and proof of ownership of other real estate owned.
