In September 2021, the average cost of a new home in the U.S. was just over $303,000. Some states see prices well over that average. In California, the average home value is almost $709,000. Hawaii's average home values are $764,000. When a homeowner is purchasing a more expensive home, a bank may require a jumbo loan.
Many conventional mortgages limit how much money you can borrow. You may be able to afford a pricier house, but a lender isn't always set up to loan you the amount you need. The Federal Housing Finance Agency sets the conforming loan limit at $548,250 (as of 11/2024). If you need a loan for more than that, you need a lender equipped to bypass the limits. This larger loan is called a jumbo loan.
There are exceptions to the conforming loan limit. If you purchase a home in a high-cost area, the conforming loan limit increases by as much as 150% to $822,375. High-cost areas include Alaska, Hawaii, and some towns/cities in California, Colorado, Florida, Idaho, Maryland, New Hampshire, New York, North Carolina, Tennessee, Virginia, Washington, and Wyoming.
When Do You Need a Jumbo Loan?
Suppose you're buying a million-dollar home and have 20% down. You still need a mortgage for $800,000. Unless you're in a high-cost area, a conventional mortgage doesn't cover your needs. You have to go to a jumbo mortgage.
Jumbo loans usually have a strict debt-to-income limit of 45%. If you are over that amount, it's likely your loan application will be denied. You have to pay down debt first and then reapply. Banks are more likely to approve a jumbo loan if you have plenty of money in the bank, too. If your savings are minimal, don't count on the loan to get approved.
You'll also need to have a high credit score. Few banks will touch borrowers who do not have at least a 720. You might find some who will allow a jumbo loan with a credit limit of 700, but it's less likely. The higher your score, the better your chances of getting the jumbo loan approved.
Things to Know About a Jumbo Loan
There are a variety of jumbo loans. Choose a 15-year or 30-year fixed-rate jumbo loan or a 5 or 7-year adjustable rate jumbo mortgage. For military veterans, there are VA jumbo loans. A VA jumbo loan usually requires a credit score of 740 or higher to avoid making a down payment.
Rates can be very competitive. As of September 22, 2021, the national average is 3.11% for a jumbo refinance interest rate or 3.18% for a jumbo loan to purchase a home. Rates vary depending on the product. The average APR for a 15-year loan is just 2.43%, while a 5/1 ARM jumbo loan's average APR is 3.61%.
How to Apply
Once you've signed a purchase agreement on a new home or want to refinance your current jumbo mortgage, you'll contact the lender of choice to apply for a jumbo loan. Fill out the application and include all of the information about your bank balances, income, debts, etc. The loan officer will pull a credit report to verify your information. You'll be asked for tax returns and paycheck stubs to prove your income.
It's in your best interest to shop around for the best jumbo loan interest rates. Choose an online loan service that helps compare rates and offers. It saves a lot of money in the long run.
