What Is a Jumbo Loan?
A jumbo loan is a mortgage that surpasses the loan limits set by the FHFA, making it a non-conforming loan. The primary purpose of jumbo loans is to enable homebuyers to purchase higher-cost properties in competitive markets. However, because these loans aren’t backed by Fannie Mae or Freddie Mac, they often have higher interest rates. “Jumbo mortgages are inherently riskier since they’re not backed by Fannie or Freddie,” explains Cohan. “This added risk usually means higher rates and more stringent qualification requirements.” Jumbo loans may range significantly in size depending on location, with some lenders offering financing up to $3 million or even higher. Carlyle Financial specializes in jumbo financing options tailored to your unique financial profile.Jumbo Loans vs. Conforming Loans
The main difference between jumbo and conforming loans lies in their size and underwriting criteria. Conforming loans align with FHFA standards, which qualify them for Fannie Mae or Freddie Mac backing. Jumbo loans, however, fall outside these limits, leading to higher qualifying standards, including a stronger credit score and larger down payment. A strong credit profile is essential. “The average score needed for jumbo approval is around 740, although I have seen some as low as 660,” Cohan says. “But if you’re high-leveraged and have a low credit score, it’s going to be hard to get a jumbo loan.” Higher down payments are also common with jumbo loans, typically ranging from 10% to 20%. “Putting down less than 10% could lead to higher interest rates or disqualification,” Cohan notes.Qualification Requirements for a Jumbo Loan
Qualifying for a jumbo loan includes multiple criteria, focusing on income stability, creditworthiness, and liquidity. Since jumbo loans aren’t government-backed, lenders are especially careful in reviewing financial stability. Here are the major qualifying factors:- Income: Lenders seek assurance that you can comfortably manage larger payments, often looking for high and stable income sources. “Jumbo lenders expect low debt-to-income (DTI) ratios,” Cohan points out.
- Credit Score: While jumbo loan credit score requirements vary by lender, a minimum of 700 is standard. “If you’re high-leveraged and your score is on the low side, approval may be difficult,” Cohan explains.
- Down Payment: Jumbo loans typically demand a down payment of 10%-20% to reduce lender risk. Some lenders may allow lower down payments with specific compensating factors, such as higher reserves.
- Reserves: In many cases, lenders require six to twelve months’ worth of cash reserves to provide a financial cushion.
Is a Jumbo Loan Right for You?
Jumbo loans are intended for financially stable buyers seeking homes in high-cost markets. If you have a stable income, strong credit score, and sufficient reserves, a jumbo mortgage could be a practical choice. Cohan emphasizes that borrowers should weigh their options. “A jumbo loan is ideal if you can comfortably afford the higher payments and have the qualifications in place.” For buyers who want to avoid the jumbo loan qualification process, piggyback loans—taking two separate loans to finance a high-cost home—can be a viable alternative.Pros and Cons of a Jumbo Loan
Pros
- Higher borrowing limits enable you to buy in competitive markets.
- Attractive interest rates that open up more real estate options.
- Suitable for high-value properties in high-cost areas.
Cons
- Increased income, credit, and reserve requirements.
- Generally higher interest rates than conforming loans.
- Limited flexibility due to stricter underwriting standards.