Jumbo loans are used in place of a conforming mortgage when the amount financed is higher than average. These types of loans are required for homes that surpass the local conforming loan limit.

An amount that exceeds the local regular loan limit will trigger a jumbo loan. On average, the maximum amount for a regular loan is $548,250, according to the Federal Housing Finance Agency (FHFA).

In general, a jumbo loan is used to finance a loan that exceeds the local or state limit for average conforming mortgages. We’ll look at jumbo loan rates, limits, requirements, and more in this article.

Trigger and Qualification for Jumbo Loan

For someone to qualify for a jumbo loan, they must meet several basic requirements. The home they are purchasing must be for more than $548,250, the average purchase limit for a traditional mortgage. Additionally, that number can vary slightly depending on the state. Higher cost areas, for example, have a set limit that is almost 150% of the average limit, or $822,375.

When qualifying for a jumbo loan, lenders will look at various different factors, including:

  • Your credit score: Most lenders for jumbo loans require your FICO score to be higher than 700
  • Debt-to-income ratio: Jumbo loan lenders will consider your debt-to-income ratio to ensure you don’t become overextended.
  • Additional Cash Reserves: You’re more likely to be approved for jumbo loans if you have ample cash in savings. Though this can be an uncommon practice, some lenders may ask for you to show that you have a cash reserve, especially if you don’t meet some other requirements
  • Additional Documentation: Traditional loans will require documentation to prove financial health, but jumbo loans often require additional documentation in comparison.
    • Complete tax returns, W-2s, and 1099s, in addition to multiple bank statements and information on any investment accounts, are all subject to review in these cases.

Qualifying for a jumbo loan may be a more tedious process that requires you to provide more information than typical conforming loans. Despite the process, there are many scenarios where jumbo loans can provide you with more opportunities than traditional ones.

Jumbo Loan Rates and Additional Costs

Most rates and other associated costs (closing, interest, etc.) for jumbo loans are higher in most cases. Because of the increased amount financed, jumbo loans usually come with a significantly higher interest rate than conforming mortgages.

Jumbo loans may also come with some additional costs, like:

  • Higher initial interest rates
  • Higher closing costs; and
  • Increased APR% for refinancing.

Jumbo loans also often include private mortgage insurance if the borrower doesn’t have at least 20% equity in their home. The typical rates for jumbo loans are usually much higher than the standard rates for an average mortgage loan and require a larger down payment.

Higher Down Payments

While low down payments are typical on conforming loans, jumbo loans are more likely to demand a down payment of at least 20%, with some lenders allowing for as little as 10%. When compared to the national average down payment of 7%, a slightly higher percentage on a larger loan can really stack up.

In addition, homes that require jumbo loans typically come with higher costs as well. This down payment amount does not include closing costs or additional charges that may be required for your specific area of purchase. For example, if you are buying a condo with HOA dues included with the monthly mortgage agreement, this amount would need to cover those costs.

Potentially Higher Interest Rates and Closing Costs

Rates for jumbo mortgages might be somewhat more significant than those on conforming loans, depending on the lender and your financial situation. According to NextAdvisor, Jumbo loan rates average between 2.4% and 3.99% currently.

Average Closing costs are typically between 2% and 5% on mortgages, jumbo or otherwise. When considering the amount financed on a jumbo loan, closing costs are typically much higher. For example, 5% of a $250,000 mortgage equates to $12,500. In contrast, 5% of a $600,000 mortgage equates to $30,000 in closing cost.

There are programs for both jumbo and traditional mortgages that allow closing costs to roll into the mortgage, but those are determined case by case.

Conclusion

Jumbo loans are loans that exceed the typical mortgage limit of $548,250. If you are looking for a home priced higher than the average cost of homes in your area, you may need to consider getting a jumbo loan.

It’s important to know what this type of mortgage entails before accepting one because it does come with some extra costs that could ultimately offset any savings on interest rates or monthly payments by quite a bit. You should consult with an experienced professional about whether this type of loan makes sense for you and how much money will be needed upfront to close the deal.