Understanding Jumbo Loan Criteria: How to Get Your Dream Home
Jumbo loans are a great financial tool if you are looking to invest in a second home, a luxury property or a vacation rental, but they are often associated with more stringent criteria compared to conventional loans.
On one hand, they exceed the conforming loan limits set by the Federal Housing Finance Agency (FHFA), and larger loan amounts typically means more financial exposure for the lender in case you default on the loan.
To compensate for the higher risk, the lender will often set stricter criteria, and require larger down payments than conventional loans.
On another hand, jumbo loans lack government backing unlike other loans, such as FHA loans, which are insured by the Federal Housing Administration (FHA); or VA loans, which are backed by the Department of Veteran Affairs.
Since jumbo loans can’t be sold to Fannie Mae or Freddie Mac – government sponsored enterprises (GSE) that provide liquidity to the mortgage market, lenders will impose stricter criteria to offset risk exposure.
In this article, we will discuss everything you need to know about jumbo loan criteria, and the requirements you’ll need to meet if you want to qualify for a jumbo loan.
What Are Jumbo Loans?
Before we dive into the specifics of the jumbo loan criteria, it’s important to understand one key question: what exactly are jumbo loans?
Jumbo loans refer to a type of home loan that exceeds the conforming loan limits set by the FHFA, which are updated annually in late November, and take effect on January 1st of the following year.
As of 2024, the average limit is $766,550 for a single-family home in all states, except for a few federally designated high-cost markets, where the limit is $1,149,825.
Jumbo loans are associated with higher loan amounts, more stringent qualification requirements, and higher interest rates compared to conventional loans. Now, let’s take a look at the exact jumbo loan criteria:
What Jumbo Loan Criteria Do I Need to Meet In Order to Qualify?
1. Provide Identity Verification
Identity verification is a must-meet criteria for any type of home loan, whether it’s a jumbo loan or a conventional one. It ensures the lender that you are who you claim to be, and helps protect against fraud.
Considering the larger loan amounts and the increased risk associated with jumbo loans, this jumbo loan criteria is especially important – it is not only obligatory for legal compliance, but also ensures that you are legitimate, and not someone who attempts to secure a loan under a false identity.
It’s important to keep in mind that financial institutions are required to follow Know Your Customer (KYC) procedures, making sure that they have accurate information about their clients, and understand the potential risks associated with each borrower.
2. Maintain a Credit Score of +700
Among the most important jumbo loan criteria is the credit score – since jumbo loans are associated with higher amounts compared to conventional loans, the required credit score is also higher.
For conventional loans, lenders will typically require anywhere between 620 and 680, although the exact numbers will depend on each individual financial institution.
However, for jumbo loans, most lenders will require a minimum score of 700 to 720, which is considered the baseline for this type of mortgage. For loan amounts that are significantly exceeding the conforming limits, you may be required to show a credit score of 740 or higher.
If you aren’t meeting this particular jumbo loan criteria, here are a few ways in which you can improve your credit score:
Regularly check your credit report
Identify and dispute errors and inaccuracies
Pay your bills in a timely manner
Keep a credit utilization ratio below 30%
Pay off your credit balances in full each month
Avoid new credit inquiries
Diversify your credit mix
Negotiate debts and collections
In addition, you can use credit monitoring tools to keep up to date with the changes in your credit score, and receive alerts for any suspicious activity. Some tools can also provide you with personalized tips to improve your credit score.
3. Keep a Debt-to-Income Ratio of Less Than 43%
When it comes to jumbo loan criteria, another important requirement that you’ll need to meet is keeping a low Debt-to-Income Ratio (DTI) – a measure that lenders such as Jet Direct Mortgage use to compare your monthly debt obligations to your gross monthly income.
This ratio is expressed in percentages, and helps lenders assess your ability to manage large monthly payments, which is particularly important for jumbo loans where the amounts are significantly higher.
You can be considered for a jumbo loan if you have a DTI ofless than 50%, but ideally, most lenders look for a Debt-to-Income Ratio of 43% or lower. Lower DTIs typically mean that you will get more favorable terms and interest rates.
Higher Debt-to-Income ratios require compensating factors such as excellent credit scores, substantial cash reserves, or significant down payments.
4. Show a Stable Employment History
Another important jumbo loan criteria that you will need to meet in order to secure this type of mortgage is to show a stable employment history. It reassures lenders that you have a reliable income source to meet the monthly payments.
Consistent employment also indicates that you have financial stability, effectively mitigating risk for financial institutions against defaulting. When it comes to proof, they will typically look for:
Length of Employment – At least 2 years of continuous employment in the same field, or with the same employer.
Industry Experience – Showing that you have extensive experience in the same industry is valuable.
Type of Employment – The type of employment also matters for jumbo loan criteria – a full-time, salaried position is seen as more stable compared with a part-time or a self-employed position.
Consistent Earnings – Be prepared to show recent pay stubs, W-2s, and tax returns to verify your income stability.
Future Employment Prospects – Lenders may also consider the overall economic outlook of your industry to assess future job security.
If you are self-employed, you will also have to show at least 2 years of successful business operation, as well as detailed financial documentation.
5. Provide Proof of Significant Cash Reserves
Since jumbo loans are associated with larger amounts compared with conventional loans, they are also considered riskier – which is why providing proof of significant cash reserves is among the most important jumbo loan criteria.
This means having at least 6 to 12 months’ worth of mortgage payments in cash reserves, acting as a safety net to cover payments in the case of income loss.
The exact cash reserve amount that the lender may ask from you will depend on the amount of the loan, your financial profile as a borrower, and the type of property that you are purchasing.
For example, investment properties or second homes usually require higher cash reserve quantities than primary residences.
6. Have a Loan-to-Value ratio of 80% or less
Next on our list of key jumbo loan criteria is Loan-to-Value Ratio, commonly abbreviated as LTV. It measures the amount of the mortgage loan you are taking, compared to the appraised value of purchase price of the property.
For example, if you are purchasing a property valued at $1,500,000, and the LTV required by the lender is 80% (which is the typical maximum for jumbo loans), you can obtain a loan amount of $1,200,000, and the rest will be down payment.
Jumbo loans usually require larger down payments than conforming loans.
7. Get a Property Appraisal
Last but not least, a property appraisal is essential when it comes to jumbo loan criteria. It provides an accurate estimate of the property’s market value, which is crucial for assessing the risk associated with the loan.
In addition, a precise valuation helps ensure that the LTV ratio aligns with the requirements of the lender, typically not exceeding the 80% we mentioned earlier. This part of the process also protects the lender’s investment by ensuring that the property is worth the loan amount.
If you are ready to qualify for a jumbo loan, Jet Direct Mortgage can help you find the perfect option for your needs and goals.
Our mission is to set a high standard in the mortgage industry through unmatched customer service, from the application process to the post-closing stage.
Our team of experienced professionals will guide you through the home loan process step by step, so you feel confident in your knowledge and make a well-informed decision on the best mortgage for you.
When it comes to jumbo loans, the most heavily weighted criterion is typically the borrower’s credit score and financial profile, including their debt-to-income (DTI) ratio and cash reserves.
Lenders prioritize these factors to assess the borrower’s ability to manage the large loan amount. A high credit score, stable income, and substantial cash reserves demonstrate financial responsibility, reducing the lender’s risk and increasing the likelihood of loan approval.
Are there specific property types that are eligible for jumbo loans?
Yes, jumbo loans can finance a variety of property types, but eligibility criteria vary by lender. Common eligible properties include single-family homes, luxury homes, and multi-family residences up to four units.
Condos and co-ops are often eligible but may require additional scrutiny due to market volatility. Jumbo loans can also finance primary residences, second homes, and investment properties, although each category might have distinct requirements.
What are the typical closing costs for a jumbo loan?
Typical closing costs for a jumbo loan range from 2% to 5% of the loan amount. They include origination fees, appraisal fees, title insurance, escrow fees, and attorney fees.
Due to the larger loan size, these costs can be substantial, so it’s essential for borrowers to budget accordingly.
What are the most common reasons for denial of a jumbo loan application?
Common reasons for denial of a jumbo loan application include a low credit score, insufficient income, or a high debt-to-income ratio, which indicate financial instability. Inadequate cash reserves also lead to rejection, as lenders require substantial reserves to mitigate risk.
Property appraisal issues, such as low valuation, can result in denial, as can employment instability or unverifiable income, both of which raise red flags for lenders.
Experienced Chief Operating Officer with a 20 + year demonstrated history of working in the banking industry. Skilled in all aspects of the residential mortgage market . Strong business development professional with a Bachelor of Science (BS) focused in Business Administration and Management, from St. Joseph College. A direct endorsement underwriter and a licensed Mortgage Loan Originator.
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