What Exactly is a Jumbo Loan?
Have your eye on a mansion on the hill? Does your dream home need to be bigger? You’ll probably need a jumbo mortgage loan.
A jumbo loan is a mortgage that finances properties priced much higher than what can be financed with a conventional loan. Typically the property is considered a “luxury property” or is located in a highly competitive real estate market, and the amount needed to finance the property exceeds the conventional loan limit set by the federal housing finance agency (FHFA).
While the FHFA sets a federal limit on conventional loans, your local conforming loan limits are set by your state and sometimes even vary by county. In Wisconsin, jumbo loans offer financing options above the conforming loan limit of $548,250.
If you have your sights set on such a home, first of all, good for you! It pays to dream big. You’ve worked hard to achieve your dream home, and Great Midwest Bank wants to be the one to help you secure it. Our local loan officers are ready to help you understand the requirements for a jumbo loan mortgage in Wisconsin and the more-rigorous standards you’ll need to meet in order to qualify for one.
Yes, we said more rigorous standards. Jumbo mortgage loans do have some extra requirements you’ll have to meet like a higher credit score, a lower debt-to-income ratio, and a slightly larger down payment. Why? Simply put, due to the larger amounts of jumbo loans, there’s an increased risk to lenders because Fannie Mae and Freddie Mac do not guarantee jumbo loans.
Jumbo mortgage loans are not for everyone, and our common-sense approach to lending means we don’t want to put you in a situation where you cannot afford to pay your mortgage. So, let’s talk about who should apply for a jumbo loan, what the qualifications are, how they work, and some alternatives if you decide a jumbo mortgage loan is not quite right for you.
- A jumbo loan is financing that exceeds the limits set by the Federal Housing Finance Agency and cannot be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac
- More rigorous credit requirements than those applying for a conventional loan.
- Approval requires an excellent credit score plus a low debt-to-income ratio.
- Average APR for jumbo mortgages is often comparable with conventional mortgages, while down payments are roughly 10% —15% of the purchase price.
Should I Take out a Jumbo Mortgage Loan?
If you are looking to purchase a property that costs more than the loan limit on traditional mortgages, you have a well-established credit history and your household income is over $250,000 a year, a jumbo mortgage loan may just be the thing to help you get into that dream home. Let’s talk about how your credit score, how you choose to use the property you want to purchase, the required down payment, and your debt-to-income ratio all can impact your qualifications for a jumbo mortgage loan.
What Are the Qualifications for a Jumbo Loan?
A jumbo loan allows you to buy various types of property. For some jumbo loans, you can buy a primary residence, a vacation home, or an investment property. While the government has no restriction on the type of property you buy, some lenders will only qualify you for a jumbo loan if you are going to buy a primary residence while others offer a loan only if you buy a commercial property.
Therefore, before applying with a particular lender, find out if they have restrictions on how borrowers intend to use the property being purchased. It should also go without saying that a property appraisal will be required to confirm the property’s value.
The intent of credit scores is to rate how trustworthy you are as a borrower based on how you have handled previous loans. Credit scores range from 300 to 850 and consider various factors, the biggest one being how fast you have repaid previous and existing loans and debts.
A strong credit score is important for most loans and lines of credit, but especially for jumbo loans. The required score to qualify will vary depending on the required loan amount. Generally, the more you are looking to borrow, the higher the credit score.
To qualify for a jumbo loan, your deposit account statements may also be reviewed. The amount of cash you have on hand, as well as a steady cash flow of money in and out of your bank account, provide assurance that you have the ability to pay off your desired loan. It is not uncommon for a lender to require that you have enough in savings to pay for a one-year mortgage before approving you for a home jumbo loan.
Historically, jumbo mortgage loans have required borrowers to pay a higher established down payment. However, these requirements are not as intimidating as they once were. The amount of loan you’re taking out will determine how much you pay as a down payment, as well as how well you meet the qualification requirements.
The ratio between what you earn and your debts is what lenders call the debt-income ratio. For example, if your monthly debt equals $2,500 and your gross monthly income is $7,000, your DTI ratio is about 36 percent. (2,500/7,000=0.357). For a home jumbo loan, your debt-to-income ratio has to be low. When you have a low debt-income ratio it indicates that you have a good flow of money and therefore it will not be hard for you to pay the loan.
However, if you have a very high credit score or if you pay a high amount for a down payment, you may qualify for the loan with a higher debt-income ratio. All of these qualifications are considered in relation to one another, not in a vacuum, so if you exceed the qualifications in one area and fall a little short in another don’t let that prevent you from talking to a loan officer about that dream home of yours.
How Does a Jumbo Loan Work?
You’re probably wondering how jumbo loans work compared to conventional mortgage loans. Like conventional loans, jumbo loans are available with various payment schedules and can be offered with either fixed or adjustable rates. Lenders offering jumbo loans are still held to standards for qualified mortgages set by the Consumer Financial Protection Bureau (CFPB).
However, with a jumbo mortgage loan, you can expect slightly higher interest rates, a larger down payment requirement, and additional closing fees than conventional mortgage loans.
Are There Alternatives to Jumbo Mortgage Loans?
After reading about jumbo mortgage loans, if you are feeling like this might be the right way to secure your dream home, then your Simply Local loan officer is waiting to hear from you, talk about the application process, and answer any questions you may have.
However, if you are looking wistfully at that listing, considering your qualifications for a jumbo mortgage loan, and deciding you don’t quite meet the requirements don’t despair. Your dream home may still be within reach. Let’s sit down and discuss your situation, person-to-person. We may have a loan product that works for you.
A ‘Simply Local’ Approach to Lending
At Great Midwest Bank, we value our relationships with our depositors and borrowers. We take the time to customize a solution, one customer, at a time. Great Midwest Bank knows the Wisconsin housing market because we are Wisconsin homeowners, too.
If searching for a home mortgage is stressing you out, breathe. Our experienced loan officers understand how you feel and can put your mind at ease. We will review all available options, including a jumbo loan, and determine what fits you best. At Great Midwest Bank, we want to help you experience a state of Bankquility® with your next home mortgage loan.
This post was originally published in March 2016. It was last updated in February 2022.