Listing prices on houses these days sure seem jumbo-sized and you’d think similarly huge loans would be required to finance them. But jumbo mortgages are an actual type of loan, and they’re only needed in specific cases.
“People will mistake any high-cost loan as a jumbo mortgage,” says Pava Leyrer, chief operating officer of Northern Mortgage Services in Michigan. “But that’s not the case.”
Here’s what you need to know about jumbo mortgages and whether you may need one to buy your next home.
What is a jumbo mortgage?
Many mortgages are guaranteed by Fannie Mae and Freddie Mac, government-sponsored enterprises that buy home loans made by lenders. But Fannie and Freddie will only buy mortgages up to $453,100—or $721,050 in one area. Home loans that exceed those conforming limits are called jumbo mortgages and aren’t purchased by Fannie or Freddie.
The Federal Housing Finance Agency sets the conforming limits and adjusts them each year based on changes in the average U.S. home price. For instance, the limit increased almost 7% from 2017 to this year.
Qualifying for a jumbo
Because Fannie and Freddie don’t purchase these loans from lenders, jumbo mortgages generally have stricter requirements than mortgages under the conforming limit. That’s because the lender holds the risk if the borrower defaults on the mortgage. “Jumbo loans look at underwriting with an extremely fine-toothed comb,” say Scott Sheldon, branch manager at New American Funding in Sonoma County, California. “They make it more difficult than it otherwise has to be.”
Here’s a breakdown of what you need and how it compares to traditional mortgages:
|Minimum credit score||680||620|
|Minimum down payment||10%||3%|
|Number of required appraisals||2||1|
Down payment: The down payment size is largely dependent on lenders. Some accept 10%, while most require at least 20%. “Lenders usually want 20% down or more,” says Leyrer, who notes that it’s often dependent on the loan size and the borrower’s qualifications. “We found only one investor who would take 20% on a $2 million loan. Everyone else wanted 25%.”
Jumbo mortgages with less than 20% down require private mortgage insurance, or PMI—just like conforming home loans. Some lenders will pay the PMI on jumbo loans, but the mortgage rate will be higher.
Other requirements: Jumbo lenders are picky about other factors as well. If you have a short sale in your past, you probably won’t qualify. Lenders also want you to have at least three to four credit accounts on your credit report. The lender may also require six to 12 months of reserves in your bank account. They will scrutinize any bank deposits and their origins.
“I had gentleman—specialty anesthesiologist—who made $1 million a year, had a [debt-to-income ratio] of 36% and $4 million in the bank. He wanted to buy a $1.1 million house. He had major bank deposit from his insurer after his original house burned down. We had probably nine underwriting conditions to satisfy,” says Sheldon. “It was over the top. It’s a very challenging loan to do.”
A jumbo mortgage in Albany likely wouldn’t be considered one in New York City. That’s because the jumbo loan limits differ depending on the county. In areas where local median home values are higher, the loan limit is also higher.
Of the 3,142 U.S. counties, 93% have loan limits up to $453,100. In about 3.5% of counties, a jumbo loan is a mortgage is between $454,250 and $672,750. These include housing markets in San Diego, Denver and Baltimore. In 99 counties—such as high-cost markets Los Angeles, San Francisco and New York City—jumbo loans start at $679,650. Two counties in Hawaii surpass even that ceiling. The loan limit in Kauai County is $713,000, and in Honolulu County, it’s $721,050.