In general, a jumbo loan will have higher interest rate than a conventional loan. However, if you can prove that you are a high-income earner with definitive capability of paying back your loan, some lenders may deem you as lower risk and thus provide you with a comparable interest rate to a conventional loan.
Securing a jumbo mortgage can offer potential tax benefits, such as deductions on mortgage interest and property taxes, which might reduce the cost of owning a high-value home. However, these benefits are subject to IRS regulations and eligibility criteria, and not all borrowers will qualify.
Payment: Often, jumbo loans require at least 10-20% down. Stricter Debt-to-Income Ratios (DTI): Lenders look for a DTI of 43% or lower. Documentation: You'll need to provide more documentation, such as income verification and asset statements.
Borrowers typically seek jumbo loans to finance high-value homes for which more traditional mortgage options are limited.
Typically, jumbo loan rates are higher than conventional loan rates. Since jumbo loans carry higher loan amounts and pose higher risks to lenders, they often come with higher interest rates. Additionally, jumbo loans may require larger down payments and stricter qualification criteria compared to conventional loans.
About jumbo loans
A loan is considered jumbo if the amount of the mortgage exceeds loan-servicing limits set by Fannie Mae and Freddie Mac — currently $806,500 for a single-family home in all states (except Hawaii and Alaska and a few federally designated high-cost markets, where the limit is $1,209,750).
Jumbo loans also have stricter approval requirements: You'll need a higher credit score, a larger down payment and a lower debt-to-income ratio than you would for a conventional loan. You may also face higher closing costs and show that you have a sizable cash reserve.
Do jumbo loans require mortgage insurance? Making a down payment of less than 20% normally means you have to pay for private mortgage insurance (PMI). That's true for most jumbo loans as well as conforming mortgages. PMI can be pretty expensive — especially for jumbo loans.
1. Max debt-to-income ratio (DTI) for jumbo loans is usually 43% Your DTI is the percentage of your monthly earnings used to pay off all debt obligations and it's used by lenders to determine how large of a monthly mortgage payment you can handle.
In most cases, you can deduct all of your home mortgage interest. How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds.
This is what you can expect lenders to use to determine your eligibility for a jumbo loan: Minimum credit score: 700. Minimum down payment: 20% Maximum debt-to-income (DTI) ratio: 45%
As a homeowner, you'll face property taxes at a state and local level. You can deduct up to $10,000 of property taxes as a married couple filing jointly – or $5,000 if you are single or married filing separately. Depending on your location, the property tax deduction can be very valuable.
Drawbacks include stricter requirements to qualify, large payments if market rates increase, lack of 5% equity requirement, and additional fees if borrower has a less than excellent credit score.
A jumbo mortgage can have a fixed rate or an adjustable rate. A 30-year jumbo mortgage will have a loan term of 30 years. Other jumbo loan options are also available.
As a general rule of thumb, you can expect to make a down payment of at least 10% on your jumbo loan. Some lenders may require a minimum down payment of 25%, or even 30%. While a 20% down payment is a good benchmark, it's always best to talk to your lender about all options.
A “piggyback” second mortgage is a home equity loan or home equity line of credit (HELOC) that is made at the same time as your main mortgage. Its purpose is to allow borrowers with low down payment savings to borrow additional money in order to qualify for a main mortgage without paying for private mortgage insurance.
While PMI is an initial added cost, it enables you to buy now and begin building equity versus waiting five to 10 years to build enough savings for a 20% down payment. While the amount you pay for PMI can vary, you can expect to pay approximately between $30 and $70 per month for every $100,000 borrowed.
Cons of Jumbo Loans
Higher closing costs and interest rates compared to conventional loans. Increased costs associated with jumbo loans make them less attractive to those looking to minimize upfront expenses. A cap on mortgage interest deduction for jumbo loans may limit the tax benefits borrowers can receive.
For 2024, the upper limit is $766,550 to $1,149,825, depending on location. Jumbo loans are mortgages that exceed these limits in their respective counties.
Although a 700 credit score will typically get you a jumbo loan approval, lenders often offer the best jumbo mortgage rates to borrowers with higher credit scores. Make a bigger down payment. Unlike conventional loans, you'll need at least a 10% to 20% down payment to qualify for a jumbo loan.
You can potentially avoid a jumbo loan by saving for a larger down payment. By saving more, you reduce the amount you need to borrow. You can also avoid applying for a jumbo loan by looking at less expensive properties you can finance with a conforming loan.
A jumbo loan is a non-conforming loan for loan amounts greater than $806,500 for a single-family home. In certain high cost areas, including Alaska and Hawaii, the conforming limit is up to $1,209,750.
Debt-To-Income Ratio (DTI)
Conventional loans typically allow a DTI ratio up to 50%, while lower DTIs may result in more favorable terms and interest rates. On the other hand, jumbo loans typically allow a maximum DTI of 45%, although borrowers with 36% or lower may get better terms and rates.