Jumbo Loan Requirements Borrowers Need to Know for 2023

Getting a jumbo loan to finance a high-priced home can be a great option, but these mortgages come with stricter requirements than conventional loans. As a borrower, it’s essential to understand jumbo loan requirements for 2023 before applying.

I’ll cover key requirements to be aware of if you’re considering a jumbo mortgage this year. Understanding these guidelines can help you determine if you may qualify and what steps to take if you need to improve your finances first.

What is a Jumbo Loan?

First let’s make sure we’re all on the same page about what a jumbo loan is.

A jumbo mortgage is a home loan that exceeds conforming loan limits set each year by Fannie Mae and Freddie Mac These government-sponsored enterprises set maximum loan limits that they are willing to buy or guarantee – loans above these limits are called non-conforming or jumbo loans

The conforming loan limit in most of the country for 2023 is $729,750 for a single-family home. So most mortgages over $729,750 this year will be jumbo loans. However, limits are higher in certain high-cost areas like New York and California.

Because lenders take on more risk with these larger loans, jumbo mortgages come with stricter borrowing requirements compared to conforming loans. Meeting jumbo loan requirements for credit scores, down payments, and debt-to-income ratios is key.

Credit Score Requirements

Your credit score is one of the most important factors lenders look at for any mortgage. But you’ll typically need higher credit for a jumbo loan.

Many jumbo lenders prefer a minimum credit score of 700. But a score of 720 or higher will give you the best shot at the lowest interest rates.

Borrowers with scores in the 600s or below will likely have a very difficult time getting approved for a jumbo mortgage. Building your credit should be a priority before applying if your score is under 700.

Paying bills on time, keeping credit card balances low, avoiding new credit inquiries, and correcting any errors can help boost your score. Give yourself several months of positive credit behaviors to improve your chances for a jumbo loan.

Down Payment Requirements

While conforming loans allow down payments as low as 3% – 5%, jumbo mortgages usually require a down payment of at least 20%. Some lenders may accept 10% – 15% down on a jumbo loan, but a 20% down payment or higher is recommended.

The larger down payment helps reduce the lender’s risk on such a big loan. Coming up with a 20% down payment on a high-value property can be the most challenging part of meeting jumbo loan requirements for some borrowers.

For example, 20% down on a $1 million home is $200,000! Don’t let that big number deter you though. Options like cash-out refinancing, loans from family, or savings over several years can help make a 20% down payment more feasible.

Low Debt-to-Income Ratio

Lenders analyze your debt-to-income (DTI) ratio to determine if you can comfortably afford the new mortgage payment. Your DTI compares your total monthly debt payments to your gross monthly income.

While lenders generally allow up to a 43% DTI on a conventional loan, jumbo mortgage requirements call for a DTI of 36% – 40% or less. The lower ratio helps reduce the risk you’ll default on a larger loan.

Paying down existing debts like credit cards and auto loans can help lower your DTI. Requesting pay increases, earning more income from side jobs, or having a co-borrower with income can also improve your ratio.

Loan-to-Value Requirements

Your loan-to-value ratio (LTV) compares the size of your mortgage to the appraised value of the home. Jumbo lenders usually want to see an LTV of 80% or less.

That means the loan amount should be no more than 80% of the home’s value. This further minimizes the lender’s risk on a jumbo mortgage. Putting down 20% or more upfront is the easiest way to meet an 80% LTV requirement.

In some cases, lenders may approve an LTV up to 90% – 95% on a jumbo loan. But you’ll likely need excellent credit and significant assets to qualify at those levels. The lower the LTV the better when applying for a jumbo mortgage.

Reserves Requirements

Lenders want to confirm borrowers have enough savings set aside to handle mortgage payments if their income drops. Most lenders require two to six months of mortgage reserves for a conforming loan.

But jumbo loan requirements call for even more robust reserves – typically 12 months or more worth of mortgage payments.

For a $600,000 mortgage at 4% interest, your monthly payment would be around $2,900. So you’d want $34,800 or more set aside in liquid savings to meet reserves requirements.

Alternative Options

A jumbo mortgage isn’t your only option for purchasing a luxury property. Here are two alternatives to consider:

• Two Smaller Mortgages – Get an 80% first mortgage for most of the purchase price, plus a 10% – 15% second mortgage. This avoids jumbo loan requirements but means paying closing costs twice.

• All Cash Offer – For buyers with enough assets to pay the full price in cash, this eliminates mortgage requirements. But you lose the leverage benefits mortgages can provide.

Improving Your Chances

Here are some final tips to boost your odds of successfully qualifying for a jumbo loan:

• Shop lenders to find the most favorable jumbo loan requirements. Guidelines can vary.
• Work on improving any weak areas of your financial profile early.
• Get pre-approved to confirm you meet requirements before making an offer.
• Consider using a mortgage broker to help you find the right lender match.