What is a Jumbo Loan?
If you’re going to obtain a loan to purchase your house, you’ll have many options. One of the options you’ll have is a jumbo loan (aka a jumbo mortgage). While many people won’t need this level of financing, the jumbo loan will help if you want to purchase a very expensive home. Here’s what you need to know about this type of mortgage.
The Differences Between Jumbo Loans and Conventional Loans
Generally, loans follow certain guidelines that have been imposed by the Federal Housing Finance Agency. This includes maximum financing limits set by Fannie Mae and Freddie Mac. When a loan follows all these guidelines, it’s considered a conforming loan. Most loans are conforming. On the other hand, if a loan doesn’t follow these guidelines, it’s considered non-conforming. A jumbo loan is just one example of a non-conforming loan.
Fannie Mae and Freddie Mac also don’t guarantee these loans, which is another one of the differences between jumbo loans and conventional loans. If you default on your loan, the lender isn’t protected from the loss. This is a big reason why these loans are so risky and why you may have a harder time obtaining one compared to a conventional loan.
Who Can Benefit from a Jumbo Loan?
If you’re looking to purchase a home with a sizable price tag or you’re wanting to buy in an exceptionally pricey sector of the market, a jumbo loan may be your best option or even your only option. Based on 2020 limits in most of the United States, you can borrow up to $510,400 for a home with a conventional loan. In more expensive areas such as Hawaii, you can borrow even more with a conventional loan before it’s considered a jumbo loan. But if you are looking to exceed that limit (borrow more than $510,400 in many areas of the country) you will automatically have no choice but to apply for a jumbo loan. These loan limits are also subject to change over time.
How Do I Qualify for a Jumbo Loan?
Because you will have to pay back a greater sum of money with a jumbo loan by definition, it’s a riskier option for the lender. And because it’s so risky, it will come with stricter requirements compared to conventional loans.
The exact qualifications will depend on the specifics of the loan you’re taking out, but you will need exceptional credit and a low debt-to-income ratio. For example, if you’re looking to get a loan that’s greater than the conventional loan limit and up to $1 million, you’ll need a solid credit score of at least 700. But if you need a loan between $1 million and $1.5 million, you’ll need a credit score of at least 720. As the dollar amount goes up, so will the credit score requirement.
Although the debt-to-income ratio may vary somewhat depending on the lender, you will likely only be able to obtain a jumbo loan with a DTI of 43% or less. Some lenders may require cash reserves, higher closing costs, and manual underwriting.
Get Help with Your Jumbo Mortgage
Whether you’re looking for a jumbo loan or any other kind of mortgage, the Carolina Mortgage Team at Revolution Mortgage would be happy to help you! We know how confusing obtaining financing for your home can be, but we do everything in our power to make it easy. To learn more, contact us today!