The Fannie Mae and Freddie Mac loan limits are adjusted annually to keep up with cost of living but with the appreciation experienced in many markets, it may not be enough. When the conforming loan limit is not enough, qualified buyers can turn to a jumbo loan.
The maximum loan limit on conforming, conventional loans for 2022 is 625,000 for a single-family home but is increased up to 937,500 for designated high price areas. The underwriting guidelines for conforming loans are consistent with regards to things like minimum down payment, private mortgage insurance, debt-to-income ratio, minimum credit score and cash reserves required.
Jumbo loans are loans more than the FNMA maximum limits and are considered non-conforming loans. This allows lenders to set their own requirements on maximum loan amount, minimum required credit score, maximum debt-to-income ratio, and minimum down payment.
The rates paid on the jumbo loans may be the same as conforming loan rates. It might sound logical that a larger loan would have more risk and therefore, be priced higher. Lenders do not sell jumbo loans to FNMA which saves them the guarantee fee normally required. This makes the jumbo loan more profitable. Borrowers are encouraged to shop the rates.
A minimum credit score of 700 will probably be required together with a debt-to-income ratio below 45%. While many borrowers seeking a jumbo may be putting 20% down, it is possible to find a lender who may only require 10% down payment. Lenders may be more lenient with regards to mortgage insurance.
Lenders may also require six to twelve months of cash reserves due to the increased risk of the larger loan amount.
It is a common practice for banks to make jumbo loans to attract other business that the borrower might be able to influence like company, corporate, or investment accounts.