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Mortgages

Jumbo mortgages can help you purchase a more expensive home, but should you consider getting one?

Jumbo loans are for those who need to more than the conforming loan limit to purchase their home.

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Leopatrizi | E+ | Getty Images

Mortgages are meant to make the homebuying process more attainable for those who can't purchase a home in-full with cash. Individuals who want to buy a home with a conventional mortgage can borrow as much as $726,200 in 2023. These loan limits are set by the Federal Housing Finance Agency (FHFA).

However, many homes on the market go for way above this price — especially if you live in a higher-cost-of-living area like San Francisco or New York City. To allow individuals to still have the ability to purchase a more costly home, lenders offer jumbo loans.

What is a jumbo loan?

A jumbo loan, or jumbo mortgage, is a loan that exceeds the borrowing limits set by the FHFA. It allows individuals to borrow more money in order to purchase a more expensive property, however these loans cannot be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac.

Jumbo loans also have stricter approval requirements. For instance, you'll need a higher credit score, larger down payment and a lower debt-to-income ratio to get a jumbo loan than compared to a conventional loan.

Before you decide to apply for a jumbo loan, there are a few things you should consider:

How much are you borrowing?

Jumbo loans are meant for those who need to borrow more than the 2023 conforming loan limit of $726,200. Certain states have a higher conforming loan limit due to the cost of living. For example, in Hawaii a jumbo loan is anything above $1,089,300.

While a jumbo loan can make it easier for you to purchase a more expensive house, you should always remember that the money needs to be paid back with interest. The larger your loan is, the higher your monthly payments will be and the more you'll pay in interest over time.

Because of this, you should carefully consider whether or not you can afford the payments on such a large loan. If the numbers don't fit into your budget, this could be a sign for you to consider opting for other less hefty loan types, like a conventional loan.

How much of a down payment can you afford?

The typical down payment required for an FHA loan is just 3.5%. With jumbo loans, though, it is typically required that borrowers make a down payment of at least 10% of the home's value. Some lenders might actually require you to make a down payment of as much as 20%.

So let's say you're purchasing a $900,000 house and your lender requires a 10% down payment; that means your down payment alone will be $90,000. This doesn't even account for your closing costs, inspections, or other fees you might incur during the process. So you can see how taking on a jumbo loan can quickly get even more expensive than taking on other loans that allow for lower down payments.

To ensure you're spending as little money upfront as possible, be sure to find out your lender's minimum down payment amount ahead of time. Ally Bank requires a minimum of 10.01%. SoFi requires a 10% minimum down payment but on top of that, this lender won't charge Private Mortgage Insurance (PMI), which can help you save some money on your payments each month.

Ally Home

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included

  • Types of loans

    Conventional loans, HomeReady loan and Jumbo loans

  • Terms

    15 – 30 years

  • Credit needed

    620

  • Minimum down payment

    3% if moving forward with a HomeReady loan

Terms apply.

Pros

  • Ally HomeReady loan allows for a slightly smaller downpayment at 3%
  • Pre-approval in just three minutes
  • Available in all 50 U.S. states
  • Online support available
  • Doesn't charge lender fees

Cons

  • Doesn't offer FHA loans, USDA loans, VA loans or HELOCs

SoFi

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included

  • Types of loans

    Conventional loans, jumbo loans, HELOCs

  • Terms

    10 – 30 years

  • Credit needed

    620

  • Minimum down payment

    3%

Terms apply.

Pros

  • Fast pre-qualification
  • Provides access to Mortgage Loan Officers for guidance
  • 0.25% price reduction when you lock in a 30-year rate for a conventional loan
  • Offers up to $9,500 cash back if you purchase a home through the SoFi Real Estate Center

Cons

  • Doesn't offer FHA, VA or USDA loans
  • Mortgage loans are not available in Hawaii

If you won't be able to comfortably afford the minimum down payment on a jumbo loan, it's safe to say that it would be best to consider other kinds of loans. FHA loans, for example, have a minimum down payment requirement of 3.5% of the home's value. A conventional loan, on the other hand, typically requires a down payment of 5% to 20% of the home's value. A VA loan can actually allow you to make a down payment of 0%, if you qualify.

Do you meet the debt-to-income ratio requirements?

Because you're borrowing more money to purchase a home, there are often stricter qualification requirements, like having a much lower debt-to-income ratio. This is because you'll be seen as a risky borrower if your file indicates that you're taking on more debt than you might be able to comfortably afford.

The maximum debt-to-income ratio (DTI) for a jumbo loan is typically 43%. By comparison, many conventional loan lenders may still consider applicants with a DTI as high as 50%. The lower your DTI, the better. You can calculate your DTI by adding up all of your total monthly debt payments and dividing that number by your gross monthly income.

What's your credit score?

According to LendingTree, jumbo loan lenders typically require a minimum credit score of 700. By contrast, other mortgage types usually ask that borrowers have a minimum credit score of around 620. So not only are DTI requirements for jumbo loans more strict, but credit score requirements are also higher.

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Bottom line

Regardless of what kind of home loan you're considering taking on, keep in mind that the type of loan and loan amount need to make sense for your financial situation. When it comes to jumbo loans especially, you should consider whether or not you qualify based on the stricter requirements, and whether or not such a large loan will be financially comfortable for you.

If you aren't sure, it never hurts to discuss your situation with a home loan expert through different lenders.

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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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