Last update: Dec 17, 2022
A Jumbo Loan is a type of mortgage loan that exceeds the limits set by the Federal Housing Finance Agency (FHFA).
The baseline conforming loan limit for 2023 is $726,200 – up from $647,200 in 2022.
The limit is higher in Alaska and Hawaii, where the number is $1,089,300 (from$970,800 in 2022) for a 1-unit property.
Usually, when your loan amount exceeds the conventional loan guideline, the Jumbo loan will be your next choice.
If you have your eyes set on a home that costs close to a million dollars or more, and you are looking to borrow money to buy it, you’re probably going to need a jumbo loan mortgage.
A jumbo loan is a non-conforming conventional loan and is considered riskier for lenders because is not guaranteed by Fannie Mae and Freddie Mac, this means the lender is not protected from losses if a borrower defaults. This is also the reason about Jumbo loan’s qualification will be a more in-depth examination of your income, asset, and affordability.
Jumbo loan requirements
Most lenders have similar jumbo loan requirements:
– Credit score: minimum 700, best 720 or higher.
– Debt-to-income (DTI) ratio: less than 43%, max 45%. If you have a cash reserve in the bank, lenders could be more flexible with DTI requirements. Lenders prefer if you have 1 year of mortgage payments as a reserve in the bank.
– Reserves: may require 6 months and 1 year of cash reserve saved for mortgage payments. The mortgage payment includes the principal, interest, property tax, and homeowners insurance.
– Downpayment: usually 10% to 20% as a minimum. Lower than 10%, you will probably get a higher interest rate.
– Income documentation: Most lenders require 2 years of documentation to prove a consistent income source. During the mortgage application process, home buyers must provide some or all of the following documentation: tax returns, pay stubs, W2 or 1099 tax forms, bank statements, proof of assets, and debts.
– Appraisals: If the home value is more than $1.000.000, may require two appraisals.
What is a Jumbo loan?
A jumbo loan is a mortgage that covers a large loan amount, which exceeds the limits set by the Federal Housing Finance Agency (FHFA). It can be used for primary homes, investment properties, and vacation homes.
The maximum jumbo loan amount varies by mortgage lender and location of the property. Qualifying guidelines can vary by lender and location too. The rate of jumbo loans is often higher than conforming conventional loans.
Other than these, jumbo loans are similar to other loan programs. They can be fixed or adjustable rates and various term options too.
Advantages of jumbo loans
– Borrow more than a traditional mortgage loan
– Competitive interest rates
– Opportunity to buy a larger home, or buy a house in areas with extremely high home values.
Disadvantages of jumbo loans
-Higher credit score required to qualify, at least 700 +
-Larger annual income needed
-Must have cash reserves to cover 6 to 12 months of mortgage payments
-DTI ratio, no more than 45%
-Usually require more in-depth documentation to qualify
Is Jumbo Loan good for you?
Jumbo loans are ideal for the segment of high-income earners, who earn a lot of money but don’t have millions in extra cash or other assets accumulated yet. They usually have better credit scores and more established credit histories and retirement accounts.
Also if you are looking to buy a house located in a high-home price area, a jumbo loan is one of the best choices for you.
Be aware if you are looking for Tax Benefits.
One important thing to consider if you are thinking to use the jumbo loan is to gain any tax benefit or a substantial tax break.
The mortgage interest you pay any given year can be redacted from your taxes, but, don’t expect a big tax break on a jumbo loan. The cap on the mortgage interest deduction is limited to $750,000 for new mortgage debt.
The Tax Cuts and Jobs Act established, anyone who got a mortgage on Dec. 14, 2017, or earlier can deduct interest on up to $1 million in debt, which is the amount of the old cap. But for home purchases made after Dec. 14, 2017, you can only deduct the interest on up to $750,000 in mortgage debt.
If your mortgage is larger, you don’t get the full deduction. For example, if you plan to take out a $2 million jumbo mortgage that accrues $80,000 in interest a year, you can only deduct the interest on the first $750.000 of your mortgage, which for sure is way lower than the $80.000 you paid for interest rate.
Be careful about all these details before you decide to apply for a jumbo loan for tax benefits, make sure you can truly afford it and what kinds of tax benefits you will receive with your Jumbo loan mount. If the jumbo loan is not the best choice for you, the other alternative is to apply for a smaller loan amount with a conventional loan and take a second loan. Talk to your loan officer to find out and compare these loan programs.
