Jumbo loans, commonly referred to as jumbo mortgages are a loan type of financing that exceeds the FHFA’s (Federal Housing Finance Agency) guidelines. Jumbo loans, unlike regular mortgages, are not eligible to buy, guarantee, or securitize them. Jumbo mortgages have special underwriting criteria and tax repercussions and are intended to fund luxury residences and homes in fiercely competitive local real estate markets.
With the housing market’s recovery from the Great Recession, these mortgages became more popular. Simply because of the higher risk involved with the larger loan amount, the mortgage qualification requirements are often significantly stiffer for jumbo loans. Those planning to purchase a property that will require a larger mortgage should have good credit, reliable income, enough savings, and a manageable amount of debt. In California, a jumbo loan is a loan that is larger than the conforming county loan limitations established by the Federal Housing Finance Agency (FHFA).
Jumbo loans are non-government-insured conventional mortgage loans. Jumbo loans are not eligible for purchase by government-backed organizations like Fannie Mae and Freddie Mac, the two GSEs that acquire and sell packaged mortgage loans, because they do not adhere to the lending restrictions established by the FHFA. Larger firms can create stronger regulations to fund these loans above the county’s lending cap, therefore jumbo loans are underwritten to individual investor requirements. Counties have different restrictions.
How to Do Jumbo Loan Work
A jumbo mortgage’s minimum standards have risen steadily since 2008, just like those for conventional mortgages. A perfect credit score of 700 or above and a very low debt-to-income (DTI) ratio are requirements for approval. The DTI should be less than 43%, ideally closer to 36%. Despite being nonconforming mortgages, jumbo loans nevertheless need to adhere to the standards of what the Consumer Financial Protection Bureau calls a “qualified mortgage”—a lending scheme with standardized terms and regulations, such as the 43% DTI.
If you decide on a conventional 30-year fixed-rate mortgage, you’ll need to demonstrate that you have readily available cash on hand to support your payments, which are probably going to be rather expensive. All borrowers must provide 30 days’ worth of pay stubs and W-2 tax forms going back two years, though specific income levels and reserves depend on the size of the overall loan. Self-employed people must provide two years of tax returns and at least 60 days’ worth of recent bank statements in addition to the higher income requirements. Along with having financial reserves equivalent to six to twelve months’ worth of mortgage payments, the borrower must also have verifiable liquid assets. Additionally, all applicants must provide evidence supporting their ownership of nonliquid assets (such as securities) and all previous loans they have taken out.
Eligibility to Get Jumbo Loan
Ultimately, how much you can borrow will depend on your assets, credit score, and the price of the house you’re interested in purchasing. A group of high-income earners who make between $250,000 and $500,000 annually are seen to be the best candidates for these mortgages. The term “high earners, not rich yet” (HENRY) refers to this group of people. These are folks that often earn a lot of money but don’t have millions in collected wealth or other assets. The average homebuyer looking for a conventional mortgage loan for a lower amount typically has worse credit scores and less established credit histories than those in the HENRY segment, who may not have amassed the wealth to buy an expensive new home with cash.
California Jumbo Loan Rates
For a variety of factors, the interest rates on jumbo loans are currently occasionally 1% to 2% lower than the rates on conforming (Fannie/Freddie) loans. There are a few reasons:
- More stringent requirements: From a risk viewpoint, jumbo loans are frequently much “safer” than conforming loans because jumbo rules are frequently significantly tougher about credit, reserve requirements (after closing), debt ratios, and down payments. For instance, one of our top jumbo investors demands 12 months of payments before any properties may be used as reserves once escrow closes. Contrarily, conforming loans frequently have minimal or no
- G-fees: Also referred to as guarantee fees, these are extra costs that Fannie and Freddie add to the loans they purchase (in exchange for their guarantee), raising rates. G-fees are absent from jumbo loans.
- Appraisals: Jumbo lenders also have a reputation for being significantly rigorous when it comes to appraisals, which makes the loans much more secure. In jumbo land, there are no appraisal waivers, and practically all jumbo lenders demand some kind of appraisal review for each transaction.
Requirements for Jumbo Loans
Lenders take on additional risk when they issue jumbo loans because they aren’t supported by federal agencies. If you’re seeking to get one, there will be stricter credit criteria. To qualify, you must also fulfill several prerequisites, such as:
- Income verification: To demonstrate that you have a dependable, continuous source of income, bring two years’ worth of tax returns or comparable paperwork. The lenders will also want to see that you have at least six months’ worth of mortgage payments in liquid assets on hand.
- Credit history and score: The better, the higher. Your chances of getting a jumbo mortgage are extremely slim if your credit score is far below average.
- DTI ratio: To be eligible for a traditional mortgage, your debt-to-income ratio must be between 43% and 45%, which compares your monthly debt payments to your monthly income. Due to the size of jumbo mortgages, lenders will often seek even lower DTIs—at most 43% and ideally 36% or even less.
- Lend to value: LTV guidelines for jumbo loans may be tougher than those for normal mortgages; they frequently call for an LTV of 80% or less. As a result, the loan can only finance up to 80% of the property’s purchase price.
- Down payment: Due to the LTV specifications, you will probably need to come up with at least 20% as a down payment upfront.
Difference Between Jumbo and Conventional Mortgages
Two types of financing that borrowers might utilize to buy homes are jumbo mortgages and standard mortgages. Homeowners must meet specific eligibility conditions for both loans, such as minimum credit scores, income requirements, repayment capacity, and down payments. As opposed to government organizations like the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA), or the USDA Rural Housing Service (RHS), both mortgages are also granted and insured by lenders in the private sector.
These two mortgage programs have some significant distinctions despite possibly serving the same purpose—securing a property. Jumbo mortgages are used to buy homes with expensive down payments, frequently those that cost millions of dollars. On the other hand, conventional mortgages are more affordable and better suited to the needs of the typical homebuyer. They could also be bought by a GSE like Fannie Mae or Freddie Mac, which is a government-sponsored enterprise.
Top Three Californian Lenders for Lumbo Loans
Here are the top choices we’ve discovered via our research if you’re ready to learn more about the top jumbo mortgage lenders in California.
SoFi is a California-based financial organization that specializes in flexible repayment plans, PLUS loans, and student loan refinancing options. They also provide jumbo loan mortgages, something you may not be aware of.
The 24th largest bank in the United States, Keybank has assets worth approximately $170 billion. They are a well-liked option among borrowers across the nation because they operate in 39 states and can originate mortgages in almost all 50. An important financial product of theirs is a jumbo mortgage loan.
- Flagstar Bank
With a jumbo product available in each of the 50 states, Flagstar Bank is a well-liked option for many borrowers seeking larger mortgage amounts. Comparing Flagstar’s rates should be a part of your investigation if you’re thinking about getting a jumbo loan.
In California, most counties have a $726,200 jumbo loan cap. The $1,089,300 California conforming loan limit applies to coastal counties, including San Francisco and Los Angeles. Depending on the county, a jumbo loan is any loan that exceeds either $726,200 or $1,089,300.