A jumbo mortgage is a home loan for an amount that exceeds the regulatory conforming loan limit. The limit is $424,000 in most of the United States and tops off at $636,150 in the highest-cost areas. The current limit in San Diego County is $619,950 for a single-family dwelling.
Here are five things you need to know about jumbo home loans and what to expect when applying for one:
1. Tougher Qualification
Jumbo loan means a larger loan balance and greater risk for the lender. As such, the restrictions are tighter, and the guidelines are generally tougher. When you think of buying a home, good credit, money saved, and solid income are prerequisites. With a jumbo home loan, the bar is raised. You are generally required to demonstrate that you have an excellent credit rating, a reasonable debt-to-income ratio, and reserve funds in order to qualify.
2. Down Payment:
Conforming loans allow for as little as 3% down. However, jumbo lenders want borrowers to have more “skin in the game.” 10% down at the very least is required in most cases and the percentage increases as the desired loan
3. More Flexibility for
Jumbo lenders have more autonomy and more underwriting authority. In some ways, jumbo loans are actually more flexible. There is little wiggle room with regards to guidelines on conforming loans. Government agencies such as Fannie Mae and Freddie Mac write the rules and leave little room for lenders to apply their own input. Jumbo lenders take on more risk, but can also choose to be more lenient when they can justify doing so. For instance, a jumbo lender may qualify a borrower who is willing to put less down but has more in reserves and/or has a stronger credit rating. The same is not true on a conforming loan. You might have $25 million in the bank, but if the conforming guidelines call for 5% down then you must put 5% down regardless of how much money you have saved, how strong your credit rating is, etc.
There is more at stake with a jumbo home loan, and thus the time between application and approval is typically longer. Conforming loans usually take roughly 21-30 days to process, approve, and fund. A jumbo mortgage can be processed quickly but typically takes 30-35 days to close.
5. A Return
There is a widespread misconception that jumbo home loan rates are higher than conforming rates. That is not always the case. During the economic downturn, when jumbo financing all but disappeared, it was indeed difficult to find a jumbo loan with a desirable rate. But, with the recovery of the real estate market in full swing, jumbo rates are now every bit as good as conventional loan rates, if not better. Jumbo loans are being offered by more lenders and the terms are quite attractive today.