When it comes to buying a luxury home or property in a high-cost market, a traditional mortgage might not cut it. That’s where jumbo loans come into play. These loans exceed the limits set by government-backed agencies like Fannie Mae and Freddie Mac, allowing borrowers to finance more expensive properties. However, with this greater purchasing power comes stricter eligibility requirements.
In this article, we’ll break down the jumbo loan requirements, explain what makes them different from standard loans, and help you understand if you’re eligible for one.
What is a Jumbo Loan?
A jumbo loan is a mortgage that exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA). These limits vary by location, but in 2024, the baseline limit for a single-family home is $726,200. In high-cost areas, such as San Francisco or New York City, the limit can be as high as $1,089,300.
If you’re buying a home that requires borrowing more than the conforming limit, you’ll need a jumbo loan. But with great loan amounts come great responsibilities—or in this case, stricter eligibility criteria.
Why Are Jumbo Loans Stricter?
Because jumbo loans aren’t backed by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac, lenders take on more risk by offering them. If a borrower defaults on a jumbo loan, the lender stands to lose a significant amount of money. As a result, lenders impose stricter requirements to ensure that borrowers can handle the responsibility of such a large loan.
Here are the key stricter requirements you’ll encounter when applying for a jumbo loan.
1. Higher Credit Score Requirements
One of the most significant differences between a jumbo loan and a conventional loan is the required credit score. For a conforming loan, lenders may accept a credit score as low as 620. However, for jumbo loans, you’ll typically need a credit score of 700 or higher.
Some lenders may require even higher scores—up to 740 or more—especially for larger loan amounts. A strong credit score is an indicator that you’ve been responsible with debt in the past and can manage the payments on a larger mortgage.
2. Larger Down Payment
Jumbo loans often require larger down payments than conforming loans. While some conventional loans allow down payments as low as 3%, jumbo loan lenders usually require a down payment of at least 10% to 20%. In many cases, the higher the loan amount, the higher the down payment.
For instance, if you’re buying a $2 million home, you may need a down payment of $400,000 or more. The larger down payment serves as added security for lenders, reducing the loan-to-value (LTV) ratio and making it less risky for them to approve the loan.
3. Lower Debt-to-Income (DTI) Ratio
The debt-to-income (DTI) ratio is another critical factor in jumbo loan eligibility. The DTI ratio measures how much of your monthly income goes toward debt payments, including the potential mortgage.
For conforming loans, lenders typically allow a DTI of up to 45%. But for jumbo loans, lenders may require a DTI of 43% or lower, and in some cases, it could be as low as 36%. This means that your monthly debts, including your new mortgage payment, cannot exceed a certain percentage of your income.
Lenders want to ensure that you’re not over-leveraging yourself with a large mortgage, so they’re stricter about keeping your DTI ratio in check.
4. Cash Reserves
Lenders offering jumbo loans often require borrowers to have significant cash reserves. This means you’ll need to show that you have enough liquid assets—such as savings, stocks, or other investments—on hand to cover a certain number of months’ worth of mortgage payments.
For jumbo loans, lenders may require anywhere from six to twelve months’ worth of mortgage payments in reserve. This provides additional assurance that you can continue making payments, even if your income takes a hit or an emergency arises.
5. Stricter Income and Employment Verification
Since jumbo loans are larger and riskier, lenders conduct more thorough income and employment verification processes. You’ll need to provide detailed documentation of your income, including:
- Tax returns for the past two years
- Pay stubs showing your current earnings
- Bank statements verifying your assets
- Employment history to ensure job stability
If you’re self-employed, the process can be even more stringent. Lenders will closely examine your business’s financials to ensure it’s generating steady income. Some may require a letter from a CPA verifying your self-employment status and earnings.
6. Higher Interest Rates
While jumbo loan interest rates are often competitive, they can sometimes be slightly higher than conforming loan rates. The reason? Without GSE backing, lenders assume more risk, and they charge higher rates to offset that risk.
However, interest rates on jumbo loans have become more attractive in recent years, often being only marginally higher than those of conforming loans, especially for borrowers with excellent credit scores and strong financial profiles.
7. Property Appraisal Requirements
Lenders also impose stricter appraisal requirements for jumbo loans. Because these loans are for higher-value homes, lenders may require two appraisals rather than just one. This ensures that the home’s value justifies the large loan amount.
In high-value markets, properties can be challenging to appraise accurately, so lenders want to make sure that the home is worth the money they’re lending.
Are You Eligible for a Jumbo Loan?
Qualifying for a jumbo loan can feel daunting, but if you meet the following criteria, you may be well on your way to securing one:
- Credit Score of 700+: A strong credit history and a high score are essential.
- Down Payment of 10-20%: You’ll need a substantial amount saved for the down payment.
- Low Debt-to-Income Ratio: Ideally, your DTI should be 43% or lower.
- Stable Income and Cash Reserves: Proof of steady income and significant savings are crucial to get approved.
- High Property Value: The home or property you’re purchasing should justify the large loan amount through a professional appraisal.
Conclusion: Is a Jumbo Loan Right for You?
If you’re purchasing a high-value property that exceeds conforming loan limits, a jumbo loan could be your best option. However, keep in mind that these loans come with stricter requirements, from higher credit scores to larger down payments and more extensive income verification.
Before applying, make sure you’re financially prepared to meet these demands. If you qualify, a jumbo loan can open the door to the home of your dreams, but it’s essential to understand the added responsibilities that come with it.
