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Main Findings
Jumbo loans are mortgages that exceed the conforming loan limits set by the FHFA. Jumbo loans are used to finance properties that are too expensive for conventional loans. Jumbo loans have some advantages, such as allowing borrowers to buy larger or more luxurious homes in high-cost areas, but they also have some disadvantages, such as higher interest rates, stricter underwriting criteria, limited availability, and higher closing costs.
A jumbo loan is a type of mortgage that exceeds the conforming loan limit set by the Federal Housing Finance Agency (FHFA).
The conforming loan limit is the maximum amount that Fannie Mae and Freddie Mac, the government-sponsored enterprises that buy most U.S. home loans, can purchase or guarantee. The conforming loan limit varies by location and property type, but for most of the U.S., it is $766,550 for a single-unit property in 2024.
Any loan amount above this limit is considered a jumbo loan and cannot be sold to Fannie Mae or Freddie Mac. Jumbo loans are also known as nonconforming loans because they do not conform to the standard criteria followed by these agencies.
Why use a jumbo loan?
Jumbo loans are used to finance properties that are too expensive for a conventional conforming loan. These properties are typically luxury homes, vacation homes, investment properties, or multi-unit properties in high-cost areas.
Jumbo loans allow borrowers to access larger amounts of financing without having to take out multiple mortgages or use other sources of funds. Jumbo loans may also offer more flexibility in terms of interest rates, loan terms, and repayment options than conforming loans.
Formula for a jumbo loan
There is no specific formula for a jumbo loan, as each lender may have different underwriting guidelines and eligibility criteria for these loans. However, some common factors that lenders may consider when evaluating a jumbo loan application are:
Loan-to-value ratio (LTV)
This is the percentage of the property's value that is financed by the loan. Jumbo loans typically require a lower LTV than conforming loans, meaning borrowers need to make a larger down payment. Jumbo loan LTVs usually range from 80% to 90%, depending on the lender and the borrower's credit profile.
Debt-to-income ratio (DTI)
This is the percentage of the borrower's monthly income that goes toward debt payments, including the mortgage, credit cards, student loans, and other obligations. Jumbo loans typically require a lower DTI than conforming loans, meaning borrowers need to have sufficient income to cover their monthly expenses and the loan payment. Jumbo loan DTIs usually range from 36% to 43%, depending on the lender and the borrower's credit profile.
Credit score
This is a numerical representation of the borrower's credit history and risk level. Jumbo loans typically require a higher credit score than conforming loans, meaning borrowers need to have a good or excellent credit history with no recent delinquencies, defaults, or bankruptcies. Jumbo loan credit scores usually start at 700 or above, depending on the lender and the borrower's credit profile.
How to calculate a jumbo loan payment
To calculate a jumbo loan payment, borrowers need to know the following information:
- Loan amount: This is the total amount borrowed from the lender.
- Interest rate: This is the annual percentage rate (APR) charged by the lender for the loan.
- Loan term: This is the number of years or months over which the loan will be repaid.
- Payment frequency: This is how often the borrower will make payments on the loan, such as monthly, biweekly, or weekly.
Using these inputs, borrowers can use an online mortgage calculator or a simple formula to estimate their jumbo loan payment. The formula for calculating a monthly payment on a fixed-rate jumbo loan is:
Payment = (Loan amount x Interest rate / 12) / (1 - (1 + Interest rate / 12)^(-Loan term x 12))
For example, suppose a borrower takes out a jumbo loan of $1 million at an interest rate of 3% for 30 years. The monthly payment on this loan would be:
Payment = ($1,000,000 x 0.03 / 12) / (1 - (1 + 0.03 / 12)^(-30 x 12))
Payment = $4,216.03
This payment does not include taxes, insurance or other fees that may be required by the lender or the property.
Examples
To illustrate how a jumbo loan works, let's look at some examples of properties that would require a jumbo loan in 2024, assuming the conforming loan limit is $766,550 for most counties.
A single-family home in San Francisco, California, that costs $1.5 million. The borrower would need a jumbo loan of $1.5 million, or a down payment of at least $733,450 (49%) to qualify for a conforming loan of $766,550.
A duplex in Seattle, Washington, that costs $1.2 million. The borrower would need a jumbo loan of $1.2 million, or a down payment of at least $433,450 (36%) to qualify for a conforming loan of $766,550.
A condo in Miami, Florida, that costs $900,000. The borrower would need a jumbo loan of $900,000, or a down payment of at least $133,450 (15%) to qualify for a conforming loan of $766,550.
Limitations
Jumbo loans have some limitations that borrowers should be aware of before applying. Some of these limitations are:
Higher interest rates
Jumbo loans typically have higher interest rates than conforming loans because they are riskier for lenders and investors. The difference in rates can vary depending on the market conditions and the borrower's profile, but it can be as high as 0.5% or more.
Stricter underwriting criteria
Jumbo loans have stricter underwriting criteria than conforming loans because lenders want to ensure that borrowers can afford the larger payments and have enough reserves to cover unexpected expenses. Borrowers may need to have higher credit scores, lower debt-to-income ratios, larger down payments, and more documentation than for conforming loans.
Limited availability
Jumbo loans are not available from all lenders or in all markets. Some lenders may not offer jumbo loans at all, while others may only offer them in certain areas or for certain types of properties. Borrowers may need to shop around and compare multiple lenders to find the best jumbo loan options for their needs.
Higher closing costs
Jumbo loans may have higher closing costs than conforming loans because they involve more complex transactions and more fees. Closing costs can include appraisal fees, title fees, origination fees, points, and taxes. Borrowers should factor in these costs when deciding whether a jumbo loan is worth it.
Conclusion
Jumbo loans are mortgages that exceed the conforming loan limits set by the FHFA. They are used to finance properties that are too expensive for conventional loans.
Jumbo loans have some advantages, such as allowing borrowers to buy larger or more luxurious homes in high-cost areas, but they also have some disadvantages, such as higher interest rates, stricter underwriting criteria, limited availability, and higher closing costs.
Borrowers should weigh the pros and cons of jumbo loans and compare them with other financing options before applying.
References
- Jumbo Loans: What You Need to Know - NerdWallet. https://www.nerdwallet.com/article/mortgages/jumbo-loans-what-you-need-to-know
- Jumbo Loan Limits, Rates And Requirements | Rocket Mortgage. https://www.rocketmortgage.com/learn/jumbo-loan
- What Is A Jumbo Mortgage And Who Needs One? - Forbes. https://www.forbes.com/advisor/mortgages/what-is-a-jumbo-mortgage-and-who-needs-one/
- What Is a Jumbo Loan? - Investopedia. https://www.investopedia.com/terms/j/jumboloan.asp
FAQ
A Jumbo Loan, also known as a non-conforming loan, is a mortgage loan that exceeds the limits set by the Federal Housing Finance Agency (FHFA). It’s used to finance properties that are too expensive for a conventional conforming loan.
The main difference lies in the loan amount. Jumbo Loans are larger than conventional loans and exceed the loan-servicing limits set by Fannie Mae and Freddie Mac. In 2024, the limit for a conforming loan is $766,550 in most counties.
Jumbo Loans have stricter qualification rules compared to conforming loans. They require a significantly larger down payment, often starting at 10%, but could be more depending on other assets.
Contrary to popular belief, the interest rates on Jumbo Loans can be comparable to conventional loans. The rates are determined by the lender and can vary based on the borrower’s creditworthiness and the loan amount.
Yes, Jumbo Loans can be refinanced. However, due to the larger loan amount, the process may be more complex and require more stringent qualifications compared to refinancing a conventional loan.
