Jumbo Mortgage

Jumbo mortgages are what’s known as “non-conforming” home loans because they don’t adhere to the requirements set forth by Freddie Mae and Fannie Mac. Specifically, these loans are underwritten for high-value homes and the borrowed amount exceeds the limits set forth by the two federal programs. Homebuyers usually use jumbo loans to purchase luxury properties and homes in expensive real estate markets.

Jumbo Mortgages Are Non-Conforming Home Loans

The majority of home mortgages are known as “conforming” home loans, which means they meet the criteria of the federal Fannie Mae and Freddie Mac programs. These criteria are set forth by the Federal Housing Finance Authority, and conforming loans can be securitized — or grouped together — with other conforming loans through the two programs. Securitized mortgages that are grouped together can then be resold or otherwise exchanged as investments.

Jumbo mortgages are “non-conforming” home loans because they don’t meet the necessary criteria and therefore, can’t be securitized or grouped through Fannie Mae or Freddie Mac. As a result, lenders who underwrite jumbo mortgages assume more risk not only because the borrowed amount is greater but also because the way they can use the mortgages is different.

The specific way jumbo mortgages vary from the criteria for conforming loans is in how much they’re underwritten for. There’s a limit to how much can be borrowed through a conforming mortgage. The limit varies by county. In 2018, it was $484,250 in most counties but as much as $762,525 in some counties with particularly expensive real estate. Any mortgage that exceeds the maximum conforming limit for a county is a jumbo mortgage.

Lenders Have Stricter Requirements for Jumbo Mortgages

Since these mortgages present a greater risk to lenders, jumbo mortgages generally come with stricter borrowing requirements than conforming mortgages do.

First, homebuyers typically need to have excellent credit. Whereas conventional mortgages normally have a minimum credit score of 620, the minimum score for a jumbo mortgage might be 700 or 720.

Second, lenders may require more extensive financial documentation. Homebuyers might have to provide tax returns, W-2s, 1099s, bank account statements and investment account statements. The paperwork required for conforming mortgages typically isn’t quite this extensive.

Third, lenders sometimes also consider the cash reserves that a homebuyer has available. Having substantial funds available can aid the approval process.

Fourth, the minimum downpayment required is at least 10 percent and commonly 20 percent. This is substantially more than the minimum 3 to 5 percent downpayment for a conforming loan (especially once the increased cost of a high-value home is taken into account).

Fifth, sometimes lenders request a second appraisal to verify the value of the home that’s being financed.

A borrower’s debt-to-income ratio is also a factor, but this is one consideration that bucks the trend of stricter requirements. Some lenders have a limit of a 45 percent debt-to-income ratio (meaning 45 percent of income goes toward debt payments), but others may relax this a little for homebuyers who otherwise can show they’re in an especially strong financial position. The debt-to-income limit for conforming loans is usually 45 percent.