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After finding that big, beautiful house, you now have to find a big, beautiful mortgage. If the amount you need to borrow is over the Federal Housing Finance Agency (FHFA) conforming loan limit of $726,200 for most geographic areas, you’ll need to get a jumbo loan.
A jumbo loan is a little different than a conventional, conforming mortgage and has its own benefits and drawbacks. You can expect increased scrutiny from potential lenders, and possibly some increased costs.
Jumbo loans can seem tempting when you want to buy a luxury home or property in a high cost-of-living area. With loan amounts exceeding conforming loan limits jumbos open doors to more expensive properties. But bigger isn’t always better. Jumbo loans come with major drawbacks you need to consider.
I wanted to provide an in-depth look at the key disadvantages of jumbo loans. That way you can make an informed decision if a jumbo mortgage is right for your situation. While jumbos have their place you may decide the extra hassle isn’t worth it.
Stricter Borrower Requirements
The biggest disadvantage of jumbo loans is the strict borrower requirements. Jumbo lenders take on higher risk with these larger loans. So they offset the risk by setting higher standards for borrowers.
Here are some common jumbo loan requirements:
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Credit score of 700+. While conforming loans allow scores as low as 620, jumbos require higher scores.
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Down payment of 20%. Some jumbo lenders allow 10% down, but 20% is more common. With conforming loans you can put down as little as 3%.
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Debt-to-income ratio below 43%. Conforming loans allow DTIs up to 50%, but jumbos require lower ratios.
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Loan-to-value ratio of 80% or less. You’ll have a hard time getting approved for a jumbo with less than 20% equity.
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Large cash reserves. Lenders want to see 6-12 months of mortgage payments in the bank. Cash isn’t required for conforming loans.
As you can see, jumbos have strict standards. If you don’t meet them all, it’ll be tough to get approved. Make sure you can check all the boxes before applying.
Potential for Higher Interest Rates
Since jumbos are riskier for lenders, it used to be common for them to charge higher interest rates. Rates have become more competitive recently, but there’s still potential to pay more compared to a conforming loan.
Lenders price jumbos based on your specific qualifications. Borrowers with pristine credit, low DTI, and sizable down payment tend to get the best rates. But if you’re on the fringe of approval, count on paying a higher rate.
I recommend shopping around with multiple lenders if you need a jumbo. Compare offers to find the most competitive rate for your situation. A fraction of a percent can make a big impact over the life of your mortgage.
Requirement for PMI with Less Than 20% Down
Conforming loans let you avoid private mortgage insurance (PMI) once you reach 20% equity either upfront or through appreciation. But most jumbo lenders require PMI even if you have 20% equity.
The only way around PMI is to put down 20% upfront. Even a 19% down payment won’t cut it. This rule forces borrowers who can’t put down 20% to pay the monthly PMI premium.
PMI doesn’t cost much compared to the overall payment. But it’s one more drawback of jumbos that add up.
Fewer Lenders to Work With
Since jumbos are riskier, fewer lenders offer them compared to conforming loans. When shopping for a jumbo, you’ll have fewer options than a standard mortgage.
Big banks do offer jumbos. But you’ll also find more choices with non-bank mortgage lenders. I recommend casting a wide net and gathering multiple rate quotes.
While jumbos are less common than conforming loans, there are still ample lenders out there. The key is doing your research to find ones who actively offer jumbos.
Higher Closing Costs
The main reason jumbos have higher closing costs is the large loan amount. Many closing fees are based on a percentage of the total loan. The higher the loan, the greater the fees.
For example, on a $750,000 jumbo the origination fee may be 1% of the total. That’s $7,500 in origination vs. $3,750 on a $375,000 conforming loan.
You’ll also have higher fixed costs like the appraisal and inspections because more expensive properties cost more to evaluate. Plus title insurance and other fees depend on the purchase price.
Closing costs vary by lender and location. But you can expect to pay $5,000-$10,000 more on a jumbo thanks to the inflated costs.
Not All Properties Qualify for Jumbos
Certain unique or complex properties don’t qualify for jumbo loans. For instance, jumbos aren’t available for co-ops or manufactured homes. Vacation homes and investment properties also may not qualify.
And since jumbos rely on being able to sell the home to recoup the loan, anything that limits marketability could disqualify a property. That includes rural land, homes with acreage, and properties requiring extensive repairs.
Conforming loans are more flexible for unique situations. So if your property falls outside the norm, a jumbo may not work. Talk to a lender upfront to see if your particular property will qualify.
Should You Get a Jumbo Loan?
Now that you know the drawbacks, is a jumbo right for you? They make sense if you need to buy a high-cost property and meet the strict requirements. But they’ll cost more over the long run.
Run the numbers to see if you come out ahead buying a luxury home vs. a lower priced property with a conforming loan. You may be able to get more house for your money and avoid the jumbo hassle.
If you have your heart set on an expensive property, be realistic about your ability to qualify for a jumbo. Work to boost your credit score, pay down debts, and grow your down payment and reserves before applying.
Jumbos open doors to phenomenal properties. But only you can decide if the drawbacks are worth it to live in your dream home. Weigh both sides carefully as you make this major financial decision.
Drawbacks of Jumbo Loans
While jumbo loans can afford you the loan you need for a higher-priced property, they do have some drawbacks you should be aware of.
• More stringent qualifications. Jumbo loans are tougher to get. You need a higher income, a high credit score, and a big down payment. Lenders also want to see a debt-to-income (DTI) ratio lower than 43%, and the loan-to-value (LTV) ratio may max out at 80% of a property’s value.
• Potentially higher rates. Jumbo loans are not guaranteed by Fannie Mae or Freddie Mac, so a jumbo loan can reduce a lender’s liquidity and expose them to more risk. In the past, jumbo loans have been offered at higher interest rates, though recently, many lenders are offering jumbo loans at a lower interest rate than a conventional mortgage.
• Need to show cash reserves. For some of the best terms for jumbo loans, you may need to show anywhere from three to 24 months’ worth of cash reserves. Furthermore, jumbo loan lenders have different standards when it comes to what is considered a cash reserve. Some lenders may be able to count your 401(k) as part of your cash reserves, while others require money to be held in a more liquid account.
• Fewer lenders offer jumbo loans. This doesn’t mean jumbo loans are uncommon by any means, but you do have to find a lender in your area that offers jumbo loans.
• Higher costs. Because jumbo loans are so large, you have higher costs all around. Closing costs are based on a percentage of the transaction. With a higher loan amount, you’ll pay more for these services. You’ll also pay more for fixed-cost services, such as an appraisal or a home inspection, if your home is larger and has more to evaluate.
Jumbo Loan vs Conventional Loan
Technically, jumbo loans are conventional loans. A conventional loan is a mortgage that isn’t a government-backed mortgage. What’s different about a jumbo loan is that it is not a conforming conventional loan.
A conforming conventional loan is one where the loan amount is less than the conforming loan limit of $726,200 for most areas and $1,089,300 for high-cost areas. This distinction is important, but it’s also common to call a conforming conventional loan simply a conventional loan.
Aside from the loan amount, other major differences between a jumbo loan and a conventional conforming loan include the down payment amount, credit score requirement, LTV ratio, DTI ratio, income requirement, and cash reserve requirement. These key differences are outlined in the chart below:
| Jumbo Loan | Conventional Conforming Loan | |
|---|---|---|
| Loan amount | Loan higher than $726,200 in most areas or $1,089,300 in high-cost areas. | Loan lower than $726,200 in most areas or $1,089,300 in high-cost areas. |
| Down payment | Down payment as low as 10% | Down payment as low as 3% |
| Credit score | 700+ | As low as 620 |
| LTV | Around 80% | As high as 97% |
| DTI | 43% or lower, 36% for some lenders | Up to 50% |
| Income | Higher | Lower |
| Cash reserves | As much as 12 months | Not required |
If you have your eye on a property that exceeds the conforming home loan limits for your area, a jumbo loan can make it happen for you. Prepare yourself for the more stringent salary, credit score, and cash reserves requirements and you’ll be able to call that home yours.
When you’re ready to take the next step, consider what SoFi Home Loans have to offer. Jumbo loans are offered with competitive interest rates, no private mortgage insurance, and down payments as low as 10%.
Pros and Cons of a Jumbo Loan
FAQ
Why not a Jumbo loan?
Are there benefits to a Jumbo loan?
Do you have to put 20% down on a Jumbo loan?
What are the drawbacks of jumbo loans?
While jumbo loans can be beneficial for homebuyers in high-cost areas, there are a few drawbacks as well: 1. Higher Interest Jumbo loans are still a significant credit risk, not only because the loan amount is so high, but also because the bank cannot resell the loan to be repackaged as a mortgage-backed security.
What are the advantages of a jumbo mortgage?
There are many advantages to taking out a jumbo mortgage, including: 1. Higher Loan Limits The first obvious benefit of a jumbo loan is that they are, well…jumbo-sized. Jumbo loans can be used to purchase bigger properties in areas where the housing market reflects higher average home prices.
Are jumbo loans hard to get?
Jumbo loans are tougher to get. You need a higher income, a high credit score, and a big down payment. Lenders also want to see a debt-to-income (DTI) ratio lower than 43%, and the loan-to-value (LTV) ratio may max out at 80% of a property’s value. • Potentially higher rates.
How can I avoid a jumbo loan?
To avoid a jumbo loan, you can choose a conventional loan and make a down payment large enough to cover the difference between the home’s price and the conforming loan limit. For example, if the conforming loan limit in your area is $647,200 and you want to buy a home worth $800,000.