When shopping for a home, you’ll also need to shop for a mortgage to purchase that home, assuming you don’t have hundreds of thousands of dollars on hand to pay in cash. If the home you have your sights on is priced higher than the mid-$500,000s, you may need a jumbo loan to buy it.
Here’s what you need to know about jumbo loans, to determine if this type of mortgage makes the most sense for you.
What Is A Jumbo Loan?
A jumbo loan or jumbo mortgage is a home loan that exceeds the limit set by the Federal Housing Finance Agency (FHFA). Unlike conventional loans, jumbo loans arenot secured by the government-sponsored enterprises Fannie Mae or Freddie Mac, making them riskier for lenders.
Fannieand Freddie set conforming loan limits for mortgages. However, jumbo loans exceed this limit and are therefore referred to as non-conforming loans or non-QM loans.
Conforming loan limits vary by state and market. In 2021, you can borrow up to $548,250 for a single-family unit in most parts of the U.S., and conforming limits go as high as $822,375 in higher-priced areas.
Like conventional loans, jumbo loans can come with fixed- or adjustable- rates. Repayment terms can vary too, including 30-year loans, 15-year loans, or a different term agreed to between the borrower and lender.
Depending on the lender, you can buy various types of properties with a jumbo loan, including a primary residence, vacation home, or investment property. However, some lenders may offer this loan type for primary residences only.
What are the Requirements to Qualify for a Jumbo Loan?
As jumbo loans are riskier mortgages for lenders, they come with stricter requirements to qualify.
Lenders typically require a 20% down payment on jumbo loans for single-family units and perhaps higher for second homes and multi-family units.
Speaking of credit scores, borrowers usually need a score of at least 700 to get a jumbo mortgage for a 1- or 2-unit with a loan limit up to $1 million. Between 1 million – $1.5 million, the required credit score is 720. Between $1.5 million – $2 million, you need a 740 credit score.For a second home, a credit score of between 720 and 740 may be required, depending on your loan amount.
To be eligible for a jumbo loan, you’ll also need a debt-to-income (DTI) ratio between
38% – 43% to qualify, depending on the lender.
Additional Considerations For Jumbo Mortgages
Before you decide if a jumbo loan is right for you, some lenders may require that you have reserves on hand. For instance, you may need to show that you have enough savings to cover 18 months’ worth of expenses. If you’re self-employed, you may need an additional 6 months’ worth of reserves.
Showing money in your bank account isn’t the only way to meet reserve requirements. Lenders may consider up to 70% of your retirement savings too. In some cases, business and gift funds may also be counted towardsa borrower’s reserve requirements.
With conventional loans, closing costs typically range between 3% – 6% of the home’s purchase value, but with a jumbo loan, your closing costs could be higher. Stable employment and steady income are also needed to qualify, with proof in the form of bank statements, tax returns, and more.
If you’re considering a jumbo loan to buy your dream home, speak with a Cross Timbers loan expert today to see if you qualify.