By Hal Bundrick, Yahoo Finance
If you're looking to buy a home priced north of $700,000, there's a good chance you'll be seeking to qualify for a jumbo loan. That type of mortgage loan is designed to serve the market for higher-value properties.
Jumbo loans are unique in some important ways, including how you qualify.
Here's what you need to know about jumbo mortgages in 2024.
How a jumbo loan works
Jumbo loans are issued by lenders willing to take on the risk of larger mortgages that cannot be sold to Fannie Mae and Freddie Mac. When a lender sells a conforming loan to Fannie or Freddie, it frees up capital to lend more. Since lenders often hold jumbo, or "non-conforming," loans on their own books, they decide, not the FHFA, what it takes for a borrower to qualify and the maximum amount they are willing to lend on a single property.
Most jumbo loan lenders will finance homes up to $2 to $3 million.
How to qualify for a jumbo loan
Specific loan requirements vary by lender, but generally, jumbo loans require a borrower to:
Have cash reserves often equal to or greater than six to 12 months of mortgage payments and expenses.
Show a history of excellent credit and proof of sufficient income.
Have a debt-to-income ratio of 45% or less.
Pay higher closing costs.
Provide a down payment of at least 10%. Some lenders look for 20% down or more.
Have a FICO credit score of 700 or higher.
Tip: There is one government agency that backs jumbo loans: the Department of Veteran Affairs. VA loans are available to military service members, veterans, and eligible survivors and usually require no down payment. Credit score requirements can be as low as 620, as well.
Pros and cons of jumbo loans
Pros
Allows you to purchase a high-cost home.
Potentially lower interest rates than conforming loans.
You have the option to get an adjustable rate mortgage.
Cons
Stricter qualifying standards.
Often requires higher cash reserves than a typical loan.
Lenders usually prefer down payments of 10% or more.
You're likely to pay higher closing costs.