What is a Jumbo Loan and When Do You Need One?

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With COVID-19 wracking the globe and tossing economies into disarray, it’s not exactly the perfect time for borrowers to be taking out enormous loans. 

While much of the population struggles from layoffs and lost income, another demographic is affected in a different way, as jumbo mortgages are temporarily halted for many buyers. 

Those who have weathered COVID-19 relatively unscathed now see an opportunity, tempted by low-interest rates and favorable borrowing times. Now, if only they could find a jumbo loan. 

When buying expensive, higher-end properties, normal protections from the Federal Housing Finance Agency (FHFA) do not apply. This is where a jumbo mortgage can give you the larger funds traditional loans do not cover.

“The difficulty for lenders to sell jumbo mortgages relative to smaller, government-backed loans has tightened credit in the jumbo market,” explains Greg McBride, chief financial analyst for Bankrate. “Fewer lenders are making jumbo loans, and those that do will often charge a higher rate.” 

Eric Jeanette is the owner of Dream Home Financing and FHA Lenders in New Jersey, where he works with clients who are affected by the market changes. “With over 30 million people losing their jobs and the threat of future foreclosures and home value declines, lenders have adjusted their guidelines and, in some instances, temporarily suspended offering various mortgage products.”

With banks approving fewer loans, it is harder to qualify, and you could face more stringent terms. The Mortgage Bankers Association (MBA) reports the availability of mortgages decreased in May 2020, with the Mortgage Credit Availability Index (MCAI) dropping by 3.1% and the Jumbo MCAI experiencing a 4.4% decline. 

So, what is a jumbo mortgage, and why would someone want one? 

What is a Jumbo Mortgage?

The term jumbo mortgage gets thrown around in financial circles, but few people are  acquainted with what a jumbo loan is and why it is so important. 

When you buy a new property, you will likely need a mortgage to finance the purchase. The federal government sets limits on how much you can borrow, and while the average property fits into this bracket with no problem, what happens when you want to take out a loan larger than the limits allow?

The conforming loan limit is set each year by the government and based on where you live, with most of the U.S. limited to $510,400 for the conventional home loan. When you exceed these amounts, you are now entering jumbo mortgage territory.

Once the price tag reaches certain heights, you do not qualify for the standard protections from Fannie Mae or Freddie Mac that would normally secure your loan. This is why a jumbo mortgage is also known as a non-conforming loan and can be available as either a fixed-rate or adjustable-rate loan.  

Why Use a Jumbo Mortgage? 

A jumbo loan is similar to a conventional mortgage, but it is equipped to support the purchase of more expensive properties. Jumbo loans aren’t just used to buy a primary residence; this type of loan is also a popular choice for investment properties and vacation homes. 

Of course, there are strings attached to a jumbo mortgage, such as a larger down payment, higher closing costs, and fewer lenders willing to lend such large amounts. There are also inflated interest rates. Even though the interest rates for a jumbo loan are low by historic standards, they are still higher than a traditional home loan.

“Housing is a great investment. In general, the people getting jumbo loans are the most creditworthy, and the money being leveraged is being put back into their businesses,” says John Lynch, the CEO of PCMA, a financial services firm that provides non-bank private client lending. Lynch cautiously recommends a jumbo mortgage to aspiring investors.

Jeanette agrees. “Even for jumbo loans, rates are still very low, and if you are able to find the right lender, it may make sense to purchase a home with a jumbo loan today.”

That doesn’t mean it is easy to qualify. 

How to Qualify for a Jumbo Loan Mortgage

Jeanette has noticed a significant shift in markets as of late. “Some of the changes we have seen in the jumbo mortgage market include lower jumbo loan limits, higher credit score requirements, less flexible loan to value ratios, and higher interest rates.”

Jumbo mortgages are difficult to procure because not every lender offers them. The bigger the loan, the longer it takes to pay off, and the extended timeline presents more risk than most lenders allow. It is still possible to get a jumbo loan, but your interest rates will be higher than the traditional home mortgage, historically between 0.25% and 0.50% higher, and it could be extremely difficult even to qualify.

Lynch gives us an exclusive inside look at PCMA’s average client for a jumbo mortgage.

  • Loan Amount: $1,004,302.89
  • Loan-to-value ratio (LTV): 61.24
  • FICO Score: 740
  • Borrower Age: 61
  • Co-Borrower Age: 59
  • Years in Home: 16

Lenders look for a higher credit score for jumbo loans than they do for the conventional mortgage. Your debt-to-income ratio is also important, and lenders tend to prefer anywhere from 43% to as low as 36%.   

The higher loan amount of a jumbo mortgage can make some banks uneasy, so to quell anxious nerves, they may ask for proof of reserve funds, such as savings or jewelry. This can go a long way in proving to a lender you are capable of repaying your loan.

The down payment is larger, too. For an average home loan, many lenders will accept as little as 3%, even though personal finance experts typically recommend aiming for 20%. On jumbo mortgages, lenders will look for anywhere from 15% to 30% down on loans.  Additional appraisals may also be required. 

Are Jumbo Mortgages Worth It Right Now? 

Joe Thweatt is the branch manager of Axia Home Loans, a full-service mortgage banking firm located across 17 states. He spends his days helping customers deal with these new post-COVID limitations. “A lot of jumbo investors have pulled back or exited the jumbo space outright.”

McBride doesn’t see it resolving soon. “This isn’t something that will likely be fixed in the short-term. When something similar happened during the financial crisis, we saw the tighter conditions on jumbo loans persist for the next five years.”

Even if borrowers of expensive properties can conquer limited lenders and rigorous qualifications, availability will be the biggest challenge in procuring a jumbo mortgage.

Despite the challenges today’s wealthier homebuyers face in the COVID age, experts seem to agree jumbo mortgages can be a good investment—if you can get one.