What Is a Jumbo Loan? (Requirements, Costs, Benefits)

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A jumbo loan is a type of mortgage used to finance real estate that exceeds traditional conforming loan limits. Also called a jumbo mortgage, jumbo loan limits are higher than those set by the Federal Housing Finance Agency (FHFA). Therefore, jumbo loans are popular with investors purchasing higher-priced properties or homes in expensive real estate markets.

The FHFA sets loan limits—called conforming loan limits—for mortgages sold to Fannie Mae and Freddie Mac. Therefore, a conforming loan or qualified mortgage gives private lenders some protection, limiting their financial risk. 

Because a jumbo-sized loan doesn’t conform to a traditional mortgage’s loan limit, different terms, underwriting standards, and interest rates apply to a nonconforming loan.

Nonconforming loans like jumbo loans are riskier for lenders. This is because they are not guaranteed by Fannie Mae and Freddie Mac. Therefore, investors applying for a super-sized loan must meet higher requirements as well as incur higher borrowing costs than conventional loans.

What is a jumbo loan, and is a jumbo loan a good option for real estate investors? We’ll also look at the pros and cons of jumbo mortgage loans to help you make an informed decision.

Jumbo vs. Conforming Loans

The main difference between a jumbo and a conforming loan is the loan limits—in other words, the amount of money you can borrow to buy a property. However, to know how a jumbo loan works, it’s vital to know the intricacies of each type of loan.

Conforming loan

This type of loan conforms to the boundaries and guidelines for government-backed loans. Typically, the terms and eligibility requirements are standard across conforming loans. However, a borrower cannot get a mortgage over the standard loan limit.

The conforming loan limit may change because it reflects housing market conditions. Additionally, the limits to purchase a single-family home vary from state to state. For example, the limits in Hawaii, Alaska, and Puerto Rico are significantly higher than in the rest of the country. Therefore, you should check the FHFA website to find the current limits.

Here are the limits for conforming loans for 2023:

• Single-family unit: $726,200
• Two-unit: $929,850
• Three-unit: $1,123,900
• Four-unit: $1,396,800

In some states, the limit can be as high as $1,089,300 for a single-family unit.

Jumbo loan

A high-value loan is necessary for financing real estate when the purchase price exceeds traditional loan limits. However, you must meet stricter requirements because you are borrowing more money.

Jumbo Loan Requirements

The requirement for a jumbo loan varies by lender. However, jumbo loan borrowers can expect tougher eligibility criteria. These criteria affect property types, loan amounts, credit scores, DTI, and cash reserves.

Here are the typical requirements you can expect to meet if you need a big-ticket loan:

Property types

Jumbo loans have few requirements regarding property type. Because there are no limits to the amount you can borrow, they are ideal for financing second homes, vacation rentals, and other investment properties. All you need to qualify for a jumbo mortgage is to meet the lender’s requirements.

Down payment

You generally need a larger down payment to secure a jumbo loan. Typically, jumbo lenders require a minimum down payment of at least 20% of the purchase price. However, some lenders require larger down payments for multifamily units and second homes. Your credit score will also impact interest rates and the down payment amount.

Credit scores

A minimum credit score of 700 is typically required to qualify for jumbo loans. Jumbo borrowers need higher credit scores than those required to secure a government-backed loan. 

However, the exact credit score a lender requires depends on the following factors:

• Credit report
• Property type
• Loan terms
• Loan amount

For example, it may be possible to qualify for a Jumbo Smart loan with a credit score of 680. However, some lenders may require a better credit score of 740. But depending on property types, you may need a “very good” credit score of 760.

As with all types of loans and mortgages, a higher credit score can mean a lower interest rate and lower monthly mortgage payments.

Debt-to-income ratio (DTI)

Typically, the maximum DTI ratio for jumbo loans is 43% of your monthly earnings. Jumbo lenders expect borrowers to have a lower DTI than for traditional mortgages. A low debt-to-income ratio is required because it shows lenders you have enough cash flow to cover monthly payments.

Proof of cash reserves

Lenders typically require that jumbo mortgage loan borrowers have six to 12 months of cash reserves to cover mortgage payments. Therefore, you must show bank statements showing you have enough cash in your bank account to keep up with payments. Additionally, a lender will consider your liquid assets.

Cash reserves refer to the amount of money you have after closing fees and costs and the down payment.

How Much Is a Jumbo Loan?

Interest rates for jumbo loans depend on market conditions, loan terms, credit scores, and down payment. For example, in 2023, the interest rate for a jumbo 30-year fixed rate was 6.90%. However, for a jumbo loan refinance or purchase, the rate was 7.02% on a 15-year fixed-term deal.

Jumbo Loan Pros

Jumbo loans provide real estate investors with several benefits to start or expand a property portfolio. 

Invest in high-value properties

A jumbo loan has no restrictive borrowing limits like a conventional loan. You can use this big-ticket mortgage to invest in the luxury real estate market or expand your portfolio into multifamily homes. You can also invest in lucrative housing markets, where house prices tend to be higher.

Additionally, you can take out a single loan to finance expensive property deals, rather than using two or more conventional loans.

Flexible property choices

Jumbo mortgages give you more options regarding the type of property you can purchase. For example, there aren’t the restrictions that sometimes come with government-backed loans.

Flexible loan terms

Lenders can offer flexible loan terms without restrictions and limits on loans to suit your financial goals. Therefore, you have more flexibility to tailor the mortgage to your portfolio needs.

Competitive interest rates

It is possible to get fixed- or adjustable-rate jumbo loans with competitive rates. In many cases, lenders’ rates can be as competitive or better than those for conventional loans.

Jumbo Loan Cons

Larger loan amounts come with extra risk to the lender. Therefore, they may impose more stringent requirements to approve the loan amount.  

Higher down payment

Typically, the down payment on a jumbo loan is more than for a conventional mortgage loan. In most cases, you need at least a 20% down payment; conventional loans can be secured with a 3% down payment or less.

Higher interest rates

Jumbo mortgage rates may be higher than for conventional mortgages. However, some lenders may offer mortgage interest rates comparable to traditional government-backed loans. So it’s worth shopping around for the best jumbo loan deals.

Higher closing costs and lender fees

Closing costs and fees associated with jumbo mortgages are typically more expensive. Therefore, you can expect much higher closing costs when securing a jumbo loan.

Stricter loan requirements

Because jumbo loans carry a greater risk for the lender, eligibility criteria are stricter to qualify for a jumbo mortgage. For example, you may need a higher credit score, down payment, cash reserves, low debt liabilities, and a stable income.

How Do I Get a Jumbo Loan?

You can qualify for a jumbo loan with a good credit score of over 700, a low debt-to-income ratio, and good cash reserves. Additionally, you must have a down payment of 10% to 20% of the loan value. Also, you should be prepared to pay the lender’s fees and costs when closing.

To get the best deals on jumbo loans, check out BiggerPockets Lender Finder. This helpful tool lets you shop for the best deals from investor-friendly lenders nationwide. Regardless of your real estate investing strategy, you can find a loan to suit your financial goals.

Is a Jumbo Loan a Good Idea for Investors?

Jumbo loans can be a great financing solution for high-value real estate investing. There are no restrictions on the size of the loan and property type if you want to diversify your real estate portfolio. However, it makes sense to consider whether such a large loan and high mortgage debt are necessary to get started in real estate investing.

Therefore, discussing your investment goals and personal finance options with a home loan professional is a good idea.

Jumbo Loan FAQs

Are you considering the benefits of jumbo loans to help expand and diversify your real estate portfolio? Here are some common questions investors ask.

Why would someone want a jumbo loan?

Jumbo loans are the ideal personal finance option for managing high-value real estate purchases. Rather than taking out two or more standard mortgages, a jumbo loan is a single-loan option, letting you purchase multifamily or luxury properties.

What type of buyer should consider a jumbo loan?

Jumbo loans are for real estate investors who are high-income earners. Also, a jumbo loan will finance the deal if the property is too expensive for a traditional mortgage. You can use the loan for a primary residence, vacation home, rental property, or other investment property.

Is it hard to get a jumbo loan?

Jumbo mortgages are harder to secure. They are high-risk loans for mortgage lenders; therefore, they come with stricter eligibility criteria. You must have a higher down payment, a good-to-excellent credit history, high income, and low debt liabilities.

Are jumbo loan rates higher?

Rates tend to be higher than for a conventional loan. However, the gap is closing, and it’s possible to find jumbo rates as competitive or lower than conventional rates.

However, jumbo loans can cost more in other ways regarding payment requirements and closing fees and costs.

Does the VA offer jumbo loans?

The Department of Veteran Affairs (VA) offers jumbo loans to qualifying service members. Depending on the amount, it’s possible to secure a VA jumbo loan with a credit score of 640 to 680 and a 10% down payment. 

Like other loans, the VA check involves a property appraisal and credit check, and you must meet income requirements. You must also pay the VA funding fee, which will be higher for a VA jumbo loan.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.