During the housing boom and bust that roiled the country in the early 2000s, jumbo loans with exceedingly large balances became a microcosm of the crisis. Experts agree they contributed to a rise in house prices and household debt, combined with a loosening of requirements and standards for borrowers approved for higher and higher loan-to-value (LVT) ratios.

Today, jumbo mortgage loans are still seen as a good fit for homebuyers on incredibly stable financial footing and can afford what some in the industry call a “luxury mortgage.” With that being said, requirements have tightened for those willing to take on a significant financial burden.

The Skinny on the Jumbo Mortgage Loan

As a homebuyer, you might be familiar with the phrase “conforming loan limit.” This is a number set by the Federal Housing Finance Agency (FHFA) that puts a cap on the size of a mortgage purchased or guaranteed by the Federal National Mortgage Association (also known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (known as Freddie Mac). The FHFA is the federal regulator of mortgages meeting criteria for backing by these two agencies and sets an annual limit adjusted each year to compensate for changes in the average price of homes across the country.

Jumbo Mortgage Loan Requirements

A jumbo mortgage loan is one in excess of the limits set by the FHFA. In 2020,  the limit is $510,400 in most of the US, with some noted exceptions. In some states and territories where the cost of living is higher — including Alaska, Guam, Hawaii, and the U.S. Virgin Islands — the limit is $765,600.  Consequently, anyone applying for a jumbo mortgage loan rather than a conventional home loan will pay more and have to meet strict qualification guidelines.

What are the Jumbo Loan Qualifications?

A jumbo loan might let you afford a larger home (complete with that in-ground pool, unobstructed views, flagstone terrace, and four-car garage), but there are a lot of strings attached to your application. Every lender you speak to will have different qualifications, but here are some standard guidelines:

  • You’ll Need a Great Credit Score.  All lenders will likely require you (and/or a spouse or co-signer) to have a minimum credit score of 680 to apply for a jumbo loan, but others might require a score of 700 to 720 or higher. That’s because a jumbo loan presents significantly more risk than a conforming or conventional loan. According to a recent article in the Wall Street Journal, some applicants were turned down even with near-perfect scores as lenders tightened their standards.
  • You’ll Need to Make a Significant Down Payment. As the coronavirus crisis ravaged the economy in early 2020, the Wall Street Journal said some non-bank lenders cut off all applications for jumbo loans. Others required anywhere from 20% to 35% for down payments. Why? When conforming loans stop getting paid, government agencies step in; with jumbo loans, there’s no safety net for the mortgage owner if the borrower can’t make payments. That means lenders will require a lot more than good faith from more affluent clients.
  • You’ll Need to Consider Your Debt-to-Income (DTI) Ratio. Add up all your monthly expenses and then divide that number by your gross monthly income. The number you come up with is your debt-to-income ratio, or what you pay out on existing debts each month vs the money you bring in. For a jumbo mortgage loan, a lender might require your DTI to fall somewhere around 40% or lower. According to the Consumer Financial Protection Bureau, studies suggest borrowers with a higher DTI are more likely to have missed monthly payments or default on the loan entirely, so any lender willing to provide you with a jumbo loan offer wants to make sure it can be paid back.
  • You’ll have to have more than money in the bank. Any lender offering you a jumbo mortgage loan will want solid evidence of all your assets and cash reserves. This will include savings accounts, checking accounts, stocks, bonds, and retirement funds, as well as assessed values of things like real estate, jewelry, vehicles, and more. To protect themselves, lenders typically require a jumbo mortgage applicant to have up to one year’s worth of mortgage payments accessible.

The Pros and Cons of a Jumbo Loan

The one big advantage of a jumbo loan is obvious — you can borrow more than you can with a conventional mortgage (an obvious benefit for anyone trying to buy in markets like New York City or San Francisco). However, there are a number of disadvantages with this type of loan beyond needing a great credit score and more money for a down payment.

Like any other loan, a jumbo loan rate will ultimately depend on your financial situation, the term length you’re asking for, and how much money you’re putting toward a down payment. But usually, jumbo loan rates will be higher than conforming loans, meaning you’ll pay more in interest over the life of the loan.

Overall, jumbo loans have strict underwriting requirements including the possibility of two appraisals instead of just one. That’s because a lender backing the loan will want to make sure the price you’re paying is justified.

Finding a Jumbo Loan Lender

If you’re shopping for a jumbo loan, you’ll want a lender that specializes in putting them together (likely someone serving clients in high-cost areas). That’s because jumbo mortgages are available for primary residences, second (or vacation) homes, and investment properties. They’re also available with fixed rates or adjustable rates and require a lending specialist familiar with all the terms and conditions that will apply.

It’s best to shop around for a lender and get information on expected down payments and adherence to a debt-to-income ratio. Do your homework and be thorough with each lender you speak to or use a mortgage broker to do most of your research.

The Bottom Line on Jumbo’s

There’s a lot more risk for lenders when it comes to jumbo mortgage loans, and that means borrowers will have to meet strict standards to even apply. Remember, jumbo loans have no government backing, so lenders are going to be careful with jumbo loan customers. While getting a mortgage already means enduring long waits for approval and navigating all the rules in place, you can expect maximum adherence to that with a jumbo mortgage loan application.

One of the bigger mistakes you can make is not understanding your current financial state and falling in love with the home of your dreams before getting prequalified for a jumbo loan. You may have to talk to a variety of lenders and mortgage brokers to structure a deal you’re comfortable with. As today’s lending environment is more complicated, pricing and approval can vary widely, even if you’re well-qualified. Throughout the process, you may need to adjust your buying strategy as long as you’re dealing with a jumbo mortgage loan.