What Is a Jumbo Loan?

A jumbo loan, also known as a jumbo mortgage, is a type of financing that surpasses the Federal Housing Finance Agency (FHFA) set. Unlike conventional mortgages, a jumbo loan cannot be purchased, guaranteed, or securitized. Jumbo mortgages are designed to finance luxury properties and homes in highly competitive local real estate markets and have unique underwriting requirements and tax implications. These mortgages have gained traction as the housing market recovered following the Great Recession.

Qualifying for a Jumbo Loan

Underwriting criteria for jumbo loans are stricter because the loans are more extensive and riskier for lenders.

• Credit score: Lenders may need your FICO score to be higher than 700, sometimes as high as 720, to be eligible for a jumbo loan.
• Debt-to-income ratio: Lenders will also assess your debt-to-income ratio (DTI) to guarantee you don’t become over-leveraged. However, they may be more flexible if you have ample cash reserves. Some lenders have a hard cap of 45% DTI, however.
• Documentation: To verify your financial health, you’ll need extensive documentation, possibly more than a conforming loan. It would help if you were ready to provide your complete tax returns, W-2s, and 1099s when applying, in addition to bank statements and details on any investment accounts.
• Cash reserves: You’re more likely to qualify for a jumbo loan if you have enough money in your bank account. Lenders usually ask jumbo loan borrowers to show they have enough cash reserves to provide one year of mortgage payments.
• Appraisals: Some lenders may mandate a second home appraisal for the property you plan to buy.

Why Use a Jumbo Loan?

If you want to buy a more expensive house than usual, a jumbo loan can help you get the financing you require. Jumbo loans aren’t just used to buy a primary residence; this type of loan is also popular for investment properties and vacation homes.

“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.