For buyers looking in high-cost areas, a conventional conforming home loan may not be high enough to finance the purchase of their home. Many homebuyers looking at these higher-priced properties end up using a jumbo loan to borrow more than the loan limit.
What Is A Jumbo Loan?
Jumbo loans are great for homebuyers who are looking to purchase in high-cost areas like the San Francisco/Bay Area and other popular metro areas. Jumbo loans are a non-conforming loan option perfect for buyers looking in higher-priced locations or who have a more expansive homebuying budget.
A jumbo loan is used to purchase properties with loan amounts that exceed the values set by the Federal Housing Finance Agency (FHFA) for conforming loans. Because these loans do not conform to the loan limits set out by the FHFA, they are not eligible for purchase by government-backed entities such as Fannie Mae and Freddie Mac. These loans are underwritten to individual investor guidelines, as these larger corporations can write stricter rules to fund these loans above the county’s loan limit.
The FHFA creates these loan limits to create stability in the marketplace and allow more of the population to access a mortgage. In 2022, the “low-balance” county loan limit is $647,200 and the “high-balance” limit for high-cost counties is $970,800. For loan amounts that exceed these thresholds, standard mortgage guidelines are removed and what is known as a “non-conforming” jumbo mortgage is required.
To offset the risk associated with these larger loan amounts, jumbo loans require higher credit scores, lower debt-to-income (DTI) thresholds, larger down payments, assets held in reserves, and stricter underwriting standards overall.
Jumbo loans are underwritten to individual investor guidelines and carry stricter qualification guidelines to offset the higher risk associated with the larger loan amounts. Jumbo loans also often come with lower interest rates given the more stringent qualifying criteria.
Pros & Cons of Jumbo Loans
Pros
Lower Interest Rates
Because the guidelines for jumbo loans are far more stringent than conforming loans, interest rates tend to be significantly lower. The range varies depending on a variety of economic factors, but often jumbo rates are 1-2% lower than conforming rates.
Access to Higher Loan Amounts
Jumbo loans can allow you to reach loan amounts well above the conforming loan limits, which significantly expands your purchasing power.
Many Loan Options
We have access to over ten different jumbo investors, each with a different set of guidelines. This gives us the flexibility to match you with the best program for your scenario.
Cons
Stringent Qualification Guidelines
These loans can be very tricky to qualify for – you’ll need excellent credit, strong income, and plenty of assets. If you can’t meet all the requirements, you’ll need to keep your loan amount below the county loan limit.
Longer Closing Timeline
Underwriters assess all aspects of a jumbo loan with more scrutiny than a conventional or FHA loan, which can result in additional document requests. This, along with the more stringent appraisal standards, results in a longer closing timeline for jumbo loans versus conventional or FHA loans. JVM Lending is still faster than almost everyone else on this front and can close jumbo loans in as fast as 17 days.
Higher Monthly Payment
With higher loan amounts comes a higher monthly payment. Even if you can qualify for a higher monthly payment, you’ll want to ensure this aligns with your budget. If keeping your monthly mortgage expense as low as possible is a high priority, a jumbo loan might not be the right fit for you.
Eligibility Requirements For Jumbo Loans:
Jumbo loans require higher credit scores, lower debt-to-income (DTI) thresholds, larger down payments, assets held in reserves, and stricter underwriting standards overall.
- Higher down payment requirements (10-20%)
- Higher minimum credit score (typically above 680-700)
- Lower debt-to-income threshold (typically 43%)
- Cash reserves needed (typically at least 6-12 months’ worth of mortgage payments)
What Is Combination Financing?
If you’re unable to meet the stringent qualification guidelines associated with jumbo financing, combination financing may be an excellent alternative for you. This loan type allows us to sidestep many of the more difficult requirements of jumbo financing, such as a 20% down payment or showing reserve funds, making them an excellent alternative if you are looking at homes in a higher price range.
Combination financing consists of two loans – the first at the maximum conforming loan limit and a second loan to “bridge the gap” between your minimum 10.01% down payment and your purchase price. Underwriting guidelines for combination financing are much less stringent than they are for jumbo loans, but they will still require a minimum credit score of 680 and a maximum debt-to-income ratio of 45%.
80-10-10 Financing Or “Piggyback” Loan
Combination financing is also known as 80-10-10 financing. This structure allows you to avoid the guidelines associated with jumbo loans by utilizing two loans – a conforming, conventional loan and a 2nd loan known as a “piggyback” loan.
With this structure, you will receive the first loan for 80% of the home’s purchase price, put a minimum of 10% down, and finance the remaining 10% with the second loan.
The first loan sits at the maximum conforming loan limit, and the second loan “bridges the gap” between your 10% down payment and your purchase price to avoid having a loan that falls within jumbo financing territory.
The interest rate on the first loan will be slightly higher than a typical conforming loan, as having a second mortgage can be seen as “riskier.” Rates for the second loan are adjustable and will range from about 4-8% depending on the loan amount and your credit score.
Combination Financing Example
Since this concept can be a bit tricky to wrap your brain around, here is an example of how it works:
You are hoping to buy a home worth $800,000 and your county’s loan limit is $647,200.
Your first loan will be structured at 80% of the purchase price. With a purchase price of $800,000, your first loan will be $640,000, which is below your county’s loan limit and will follow the guidelines of conventional conforming financing.
Of the 20% down payment, you will need to come in with 10% ($80,000) and receive a second loan for the other 10% (the other $80,000).
Eligibility Requirements for Combination financing:
Underwriting guidelines for combination financing are much less stringent than they are for jumbo loans but are more stringent than traditional conventional loans that do not have the second mortgage associated.
- Minimum 10% down payment required
- Minimum 680 credit score required
- Maximum debt-to-income ratio of 45%
- Maximum loan amount of $500,000 for the “piggyback” loan
Jumbo vs. Second Mortgage – Which Loan Type Is Right For You?
There is no one-size-fits-all for mortgage financing. The best way to determine whether a jumbo loan or a second mortgage makes the most sense for you is to talk to one of our mortgage experts at JVM Lending. Our experts can walk you through monthly payment scenarios, give you current interest rates, and discuss any other questions or concerns you might have.
