Jumbo Loans: Requirements and Guidelines 2021CASAPLORERTrusted and Transparent
A Jumbo Loan is a mortgage that is larger than the maximum limit set by the Federal Housing Finance Association (FHFA). The loan limits set by the FHFA are known as conforming loan limits, and these limits vary by area. If a loan is beyond the conforming limit of that specific area, then it is considered a jumbo loan.
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What is a Jumbo Loan or Jumbo Mortgage?
Jumbo Loan, also known as non-conforming conventional loans are mortgages that are larger than the conforming loan limits. Conforming limits are set by the Federal Housing Finance Association (FHFA), and it outlines the maximum mortgage size for a specific area. Jumbo loans are too large to be insured by the government sponsored agencies such as Federal National Mortgage Association (Fannie Mae) & Federal Home Loan Mortgage Corporation (Freddie Mac). Jumbo loans typically have a higher mortgage interest rate as compared to conventional loans.
For example, if the conforming loan limit in your area is $510,000 and the mortgage amount is $600,000, then it is considered a jumbo loan. Conventional conforming home loans are within the conforming limits set by the FHFA and can be guaranteed by agencies such as Fannie Mae & Freddie Mac. Jumbo loans, like conventional loans, also have the option of a fixed interest rate or adjustable-rate mortgages (ARM). ARM’s mortgage rate is determined by a benchmark index like the Prime rate, which is linked to the Fed funds rate, and an additional credit spread. FHA loans, VA Loans, and USDA loans are all examples of mortgages that are insured by government agencies.
How are Conventional Loans and Jumbo Loans related?
Conventional loans are mortgages that are used by the average home buyer, these mortgages can be conforming or non-conforming. If they are conforming then they fit the guidelines set by the Federal Housing Finance Association, and if they are non-conforming, they do not meet these requirements. Conforming loans can be insured by agencies such as Fannie Mae and Freddie Mac, whereas non-conforming loans cannot.
Jumbo loans are also conventional loans; however, they are non-conforming conventional loans as they do not meet the requirements set by the FHFA. They specifically do not meet the conforming loan limit requirement, which states that the price of the home must be below a certain threshold for a specific area.
Jumbo Loan Limits
The Jumbo loan limits are the conforming loan limits. The average jumbo loan limit in 2021 for a majority of counties is $548,250. This means that in those counties if the loan size is larger than $548,250 it will be considered a jumbo loan. Similarly, high-cost counties have a higher jumbo loan limit set at $822,375. You can find your jumbo loan limit on the Federal Housing Finance Agency page.
Latest News on Jumbo Loans
Recently, it has become harder to obtain a jumbo loan due to the Coronavirus pandemic. COVID-19 has resulted in a loss of jobs, savings, and affected the entire economy. As a result of which, jumbo loan lenders have to bear the full risk as they cannot sell the mortgages. Prior to the pandemic, jumbo mortgage lenders depended on investment firms and banks to buy mortgages and this would help reduce the risk for the lenders. However, the negative economic effects of the pandemic have resulted in a complete decline in the purchase of these loans by firms, making it difficult for mortgage lenders to hand out riskier jumbo loans to consumers.
In what Cases are Jumbo Loans used?
Jumbo Loans cater to expensive and luxury properties in locations where housing prices are rising at a rapid pace such as New York and Los Angeles. These loans are different from conventional conforming loans and have stricter requirements such as a higher minimum down payment and certain tax implications. For example, if the conforming limit is $550,000 in a specific county and a mortgage is $600,000, then it has to be a jumbo loan as it is beyond the limit and too large to be insured by the federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). This means that if the borrower defaults, the lender is not protected from any losses by Fannie Mae and Freddie Mac.
How do I apply for a Jumbo loan?
The procedure for obtaining a jumbo loan is similar to a conventional loan, however, as these loans are riskier than conventional conforming loans lenders have stricter requirements. The first step to obtaining a jumbo loan is to get your financials in order - credit score, savings, cash liquidity, debt, and income statements. The next step is to find a lender; this is important as different lenders have different requirements and it is important to choose a lender that best fits your needs. You can use the services of a mortgage broker to help you attain the best rate from the lender. Once you choose a lender, the pre-approval process is the third step. Pre-approval is essential as it will give you an idea of the size of the jumbo mortgage and the price of the home you can afford. Once the application is submitted, your lender will determine your final eligibility for the jumbo loan.
Jumbo Loan Eligibility Requirements
Jumbo Loans have stricter eligibility requirements compared to conventional conforming loans because these loans have a greater risk. Jumbo loans are not guaranteed by Fannie Mae & Freddie Mac and are larger than conventional loans, increasing the potential loss to the lender if the borrower defaults. Most requirements are similar to conventional loan; however, the requirements for jumbo loans are stricter:
- Credit Score – As the loan size is larger, lenders require a minimum credit score of 700. The credit score requirement can vary depending on the size of the loan: a loan under $1 million will require a score of at least 700; a loan between $1 million and $1.5 million will require at least 720; loans greater than $1.5 million will require a credit score of at least 740. The reason for higher credit scores is because lenders need additional assurance that the mortgage amount can be paid back.
- Minimum Down Payment – The minimum down payment on jumbo loans is at least 20% of the home price. There are exceptional cases where a minimum down payment of 10% is allowed but that is up to the lender. The lender will also require you to get Private Mortgage Insurance if the down payment is less than 20%.
- Debt to Income Ratio– Your debt-to-income (DTI) ratio must be less than 43%, and some lenders require it to be closer to 36%. This means that monthly, your debt payments including student loan and credit card debt payments must be less than 36% of your gross monthly income.
- Cash Reserves – There must be enough cash liquidity in your bank account to cover one year’s worth of mortgage payments. This requirement ensures the lender for 12 months of stable payments as there is limited risk for this period. The greater the cash reserves, greater the chance of being approved by the lender.
- Documentation – Adequate documentation regarding your employment, tax returns, investment accounts will be required. Self-employed individuals will be required to show more documents depending on the lender.
Your mortgage interest payments can be claimed in your tax return as itemized deductions, but there are limits to the size of the mortgage and the amount that can be deducted. Prior to December 14th, 2017 the tax-deductible could be on interest on a mortgage of $1 million. Whereas following the Tax Cuts and Jobs Act the IRS has reduced the deduction limit on interest to a mortgage size of $750,000. Therefore, any mortgage interest amount on debt greater than $750,000 cannot be claimed as an itemized deduction. For example, if you have a jumbo loan of $1 million, and you accrue a total interest of $40,000 in the year, you will only be able to claim an itemized deduction on interest for $750,000 of your mortgage which is $30,000. The example shows that even though the total interest is $40,000, the maximum itemized interest deduction can only be on $30,000 because of the $750,000 limit.
What is a High Balance Loan?
A high balance loan is a loan amount that exceeds the 2021 base loan limit of $548,250 but is below the higher loan limit of $822,375. High balance loans are still conforming loans as they are within the limits set by the FHFA and can be insured by Fannie Mae and Freddie Mac. For example, you are planning to buy a home in New York, the loan limit is $822,375 as it is a high-cost area, you wish to purchase a home will result in a mortgage loan of $700,000, this amount is greater than the average loan limit of $548,250 but less than $822,375, therefore, it is a high balance loan. In the same example, if you change the mortgage amount to $850,000 then it becomes a jumbo loan as it exceeds even the higher limit of $822,375.
Change in Conforming Loan Limit since 2008
The data below shows the change in the conforming limits for a single-family unit since the Housing Market Crash of 2008. The average loan limit is the conforming limit for most counties in the US. The limit for high-cost areas is always 150% more than the average loan limit. There was a 6.83% increase in the average loan limit from 2017 to 2018, followed by a 6.87% increase from 2018 to 2019, a 5.4% increase from 2019 to 2020, and lastly, a 7.41% increase from 2020 to 2021. The chart also shows the median house prices in the following years. The general trend is that the limits increase as the median house price increases. The conforming limits were not changed between the period of 2008 – 2016 as median prices were not rising rapidly.
Change in Coforming Loan Limits and Median Home Price
|Year||Base Limit||Upper Limit||Median Home Sale Price|
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