Jumbo Loan Requirements—A Comprehensive Guide

If you’re searching for a luxurious home or want to buy a home in a high-cost area, then it’s essential for you to understand jumbo loan requirements. 

A jumbo loan is one that goes beyond conforming loan requirements and is sometimes necessary in certain locations. And unless you can pay for a property in cash, you’ll need to secure a jumbo mortgage. 

In this guide, we’ll discuss how jumbo loans compare to conventional, when you may need one, and how you can qualify. 

What are jumbo loans?

A jumbo loan is still considered a traditional loan, but one that surpasses the conforming loan limits—established by the Federal Housing Finance Agency (FHFA) for Fannie Mae and Freddie Mac. 

These government-backed entities are responsible for purchasing and selling mortgages from private lenders and are prohibited from acquiring loans that surpass the conforming loan limits. 

As of 2023, single-family mortgages with balances exceeding $726,200 in most U.S. counties (and $1,089,300 in high-cost areas) will be classified as jumbo. 

The jumbo loan solution

Fortunately, jumbo mortgage loans are designed specifically for financing high-value homes that exceed the restrictions set by government-sponsored enterprises Fannie Mae and Freddie Mac. 

With jumbo mortgages, borrowers have the option to consolidate their financing into a single mortgage for their high-value property. 

Nonetheless, it’s important to note that the larger loan amounts and an increased risk for lenders mean that borrowers must meet stricter requirements.

Jumbo mortgage loan requirements

Lenders need extra reassurance that a jumbo loan will be repaid. 

To qualify for a jumbo loan, meeting three key requirements is crucial: a high credit score, a low debt-to-income (DTI) ratio, and substantial cash reserves.

Jumbo loan credit score requirements

Lenders depend on your credit score to evaluate your financial reliability and will analyze your credit report for any adverse items, including missed or late payments, foreclosures, and bankruptcy. 

Scores are going to vary from lender to lender. Typically, a jumbo loan necessitates a minimum credit score of 700. While possibilities may exist for a score as low as 680, you’ll likely find yourself with a higher interest rate if your score falls under 700.

Jumbo loan debt-to-income ratio

This ratio—called DTI for short—compares your gross monthly income with your outstanding debts. If your debt percentage is significantly higher than your monthly income, lenders may have concerns about your ability to make mortgage payments during financial hardships.

If your credit score is not great, you might be able to offset it with a low DTI. And even if you have a high DTI, it can be offset if you possess substantial cash reserves or an exceptional credit score.

A crucial aspect—cash reserves

Lenders consider the cash reserves in your bank as an important factor for approval or denial. 

Depending on the loan amount, they may request proof that you can sustain mortgage payments solely from your reserves for a specific duration (typically 6-12 months) after all the fees and closing costs are paid for. 

Jumbo loan qualification process

Besides credit scores, DTI ratio, and cash reserve statements, lenders will also request documented evidence of your income and assets, as well as an appraisal to validate the property’s value. 

Documents required 

Lenders commonly request documentation as proof of income and sufficient funds to cover your down payment, closing costs, and cash reserves. 

This typically includes:

• Tax returns from the past two years, along with your W-2s.
• Pay stubs from the last 30 days.
• Bank statements covering the previous 60 days.
• If you are a business owner or self-employed—a profit/loss statement and balance sheet.
• Additionally, documentation for any other sources of income, such as commissions, bonuses, investment earnings, and any additional deposits.

Appraisals

Lenders will seek an appraisal to validate the accuracy of the property’s value—to ensure that the property’s worth is sufficient for a jumbo loan and to determine the loan-to-value (LTV) ratio.

Loan-to-value ratio

The loan-to-value (LTV) ratio is a pivotal factor in determining loan eligibility, down payment requirements, and interest rates. 

The LTV ratio is computed by dividing the loan amount by the appraised value or purchase price of the property, selecting the lower of the two values. 

Jumbo loan down payments, interest rates, and fees

Given that jumbo loans are higher in value compared to typical mortgages, the associated down payment and closing costs tend to be higher as well. 

The gold standard for any downpayment is still 20%, but you can find a lender who might accept as little as 5%—but this likely means a higher rate. 

And since the larger principal amount of a jumbo loan means even a slight percentage difference will significantly impact the total amount you’ll pay over time. 

Is a jumbo loan right for you?

Understanding the requirements for obtaining a jumbo mortgage is crucial for anyone looking to secure a loan for a high-value property. 

Strong financial stability, including a high credit score, a low debt-to-income ratio, and substantial cash reserves, are the key factors that lenders consider. 

These qualifications, along with providing the necessary documentation, such as income statements and bank statements, will streamline the qualification process.

If you have any questions or need guidance throughout the mortgage application process, our team of dedicated loan officers at Homefinity is here to help.

Get started on your journey to owning your dream home today.