Jumbo Loans: What are They and (When) Should You Consider One

So, What Is a Jumbo Loan?

Beyond the typical mortgage loans most of us are familiar with, a jumbo loan or mortgage, as the name implies, covers a larger-than-normal loan amount. Specifically, a jumbo loan exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA), and is not eligible to be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac.

Most mortgage loans are conforming loans, which means that they conform to, or follow, specific criteria followed by Fannie Mae and Freddie Mac, the government-sponsored enterprises that buy most U.S. home loans. Jumbo loans don’t adhere to these criteria, so they fall into the financing category of non-conforming mortgage loans.

Typically, lenders offer jumbo loans to finance luxury properties and homes in very expensive local real estate markets and have more stringent underwriting requirements for them. Also, jumbo loans usually come with stricter credit requirements and higher interest rates.

In high-cost areas like Los Angeles, Orange County, California, and Alaska -- due to its remote nature -- current loan limits that distinguish a jumbo loan from a conventional loan would include any loans above $1,149,825. In other areas of Southern California and much of the rest of the country, the standard conforming loan limit for a single-family home is lower, closer to $766,550.

What are the Borrower Requirements?

Like traditional mortgages, the credit requirements for obtaining a jumbo mortgage have become increasingly stringent since the financial crisis of 2008.  Jumbo loans usually have more rigorous income and asset verification processes due to potential higher risk. While a credit score of 700 or higher is typically required by financial institutions, Nuvision is able to offer jumbo loans to those with a 680 fico score.

To get approved for a jumbo loan, home buyers should have a favorable debt-to-income (DTI) ratio, typically under 43%.  Some lenders may allow a slightly higher DTI. Nuvision considers 45% DTI -- and up to 50% potentially -- with stronger compensating factors.

Market Trends for Jumbo Loans

The market for jumbo loans has changed in recent years. The market has fluctuated with economic conditions, with lenders tightening and loosening criteria based on market risk.

Economic factors, such as interest rate changes or housing market trends, can have an impact on jumbo loans.  Rising interest rates can make jumbo loans more expensive, while falling property values can increase loan risks. We are waiting to see what, if any, impact the recent interest rate cut by the Fed has on jumbo loans.

The rate cut may lead to lower borrowing costs, but it’s not guaranteed. Some experts believe mortgage rates could remain steady for now, since much of the anticipated cuts have already been priced into the market.

Advantages of a Jumbo Loan

The primary advantage of a jumbo loan is that it allows borrowers to take out a mortgage that exceeds the conforming loan limits put in place by the FHFA.

A jumbo loan is a great option for homebuyers searching for an expensive home or any home in a robust housing market. Currently, these loans may offer an advantage to buyers in high-cost real estate markets, though higher interest rates may offset some of the benefits.

Jumbo loans also offer the ability to consolidate home financing under one loan product for added convenience and streamlined financial management. They can eliminate the need to look at using multiple loan products for one residence, or spending years trying to save enough to pay cash outright or offset conforming loan limits.  Those looking for an opportunity to maximize the financial benefits of this kind of loan may want to consider investment property, such as a duplex, triplex, quad, or other multi-family property.

With opportunities for better rates and fewer restrictions, jumbo rates could be a great option for many homebuyers who feel restrained by conforming loan limits. Bottom line, you’ll have more buying power with a jumbo loan than with a conforming loan, but you’ll pay more in interest since your balance is larger.

Interest Rates and Costs vs a Conventional Mortgage

Credit score, down payment size, loan amount, property type, and market conditions can influence the interest rate of a loan. Interest rates for jumbo loans are often slightly higher than those for conventional loans, due to the larger loan amount and increased risk.  

The interest rates on jumbo loans often differ from conforming loans. Historically, jumbo loans have been higher; however, the gap has closed of late. As of April 1, 2024, the 30-year jumbo rate was 7.06 percent, according to Bankrate’s survey of national lenders, vs. 6.93 percent for the traditional 30-year fixed loan. Part of the reason for this is an increase in guaranteed fees charged on conforming loans to lenders by Fannie Mae and Freddie Mac.

One thing to remember, jumbo loans often have higher closing costs and may include additional fees due to the larger loan amount. Currently, Nuvision is waiving our $995 loan origination fee on qualified purchases.

Loan Options and Flexibility

Despite their “nonconforming” status, jumbo loans aren’t much different from traditional mortgages when it comes to the way they work. The payment schedules and other details are generally the same.

There are different types of jumbo loans available, such as fixed-rate or adjustable-rate options, giving borrowers some flexibility -- and, there are no prepayment penalties on these types of loans. Also, borrowers can refinance a jumbo loan, but they should consider current interest rates, costs, and property value when considering refinancing.

Determining if a Jumbo Loan is Right for You

When considering a jumbo loan, you need to look at a few key factors. You need to have a strong credit score, stable income, and keep in mind your long-term financial goals before opting for a jumbo loan. The best way to determine if a jumbo loan is the right choice for you comes down to evaluating your budget, the property’s value, interest rate risk, and your overall financial stability.

Navigating the housing market is tricky, but being well-informed can make a difference. If you’re considering a jumbo loan or a conventional mortgage loan, our highly experienced team of mortgage professionals will provide the support, guidance, and tools you need to make the best decision for you and your family when buying a home. We’re here for you and the life you’re building.