As home prices have skyrocketed, homebuyers have found themselves in the challenging position of needing to borrow oversized sums of cash to be able to purchase new properties. If the amount of money you need to borrow crosses a certain threshold, it jumps into the jumbo loan category.
A non-conforming or jumbo loan is a loan above the limit set by the Federal Housing Finance Agency. Currently this is $647,200 for a single-family home in most areas, but it can go up to $970,800 depending on the state and county where the property is located.
Borrowing that much money might sound overwhelming, but it’s actually becoming more common due to the surge in home values. In fact, between 2020 and 2021, jumbo loan securitization more than doubled, according to an analysis by CoreLogic, and last year, the dollar volume of jumbo loan originations hit its highest since 2005. If you’re wondering whether jumbo loans are still available, the answer is a resounding yes.
What’s changed in the jumbo loan market?
When the pandemic created serious economic challenges, mortgage lenders all tightened their criteria around issuing loans. Initially, that led to more rigorous requirements for jumbo loan approvals and fewer options for borrowers.
After that period of troubling uncertainty, though, the challenges turned out to provide a huge boost for the housing market. The definition of “affordable” changed, with home values increasing by double-digit percentages in the vast majority of metropolitan areas. As the National Association of Realtors reported, some cities like Austin, Phoenix and Boise saw home prices soar by some 25 percent year-over-year.
As more borrowers look for jumbo loans, another unexpected twist has happened: Some jumbo rates are now lower than rates on conforming mortgages. As of early this month, for example, the most competitive 30-year jumbo loan rates at Truist were 0.7 percentage points lower than the rates on conforming 30-year loans. In a Mortgage Bankers Association survey at the end of March, the average interest rate on jumbo loans was lower than the conforming average.
While surprising, this reflects the fact that most jumbo loans are going to borrowers who have impeccable credit that qualifies them for attractive financing.
The requirements for approval on a jumbo loan have also loosened in comparison with the beginning of the pandemic. Ally Bank — which initially decreased its loan-to-value (LTV) ratio to 80 percent — now accepts an LTV ratio of 90 percent, and smaller lenders like Filo Mortgage accept credit scores as low as 680 on jumbo loans.
Simply put, jumbo loans no longer seem so far out of reach for borrowers.
What’s in store for jumbo loans in 2022?
As the Federal Reserve raises rates and inflation presents challenges for the economy, jumbo loan mortgage rates will likely continue to increase this year. That’s bad news if you’re looking to borrow a large sum, but there could be some relief in sight. One of the key trends expected to shape real estate this year is a slowdown in price appreciation. While you could still need to apply for a jumbo loan, the market might be able to help you keep the size of that loan in check.
The other potential bright spot is that the increase in conforming loan limits means you might be able to sneak in under the jumbo mark. For example, the median price of a home in the Nashville, Tennessee area in February was close to $450,000, according to the Greater Nashville Realtor association — well below the 2022 limit in Davidson County, $694,600.
However, if you’re looking in higher-priced areas like California or Hawaii, the supply of affordable housing might be so low that you’ll have to find a jumbo loan.
What to do if you need a jumbo loan
- Think big: If you’re in the market for a jumbo loan, larger banks are some of the best mortgage lenders. “Borrowers will want to look for a lender that has a strong track record of underwriting jumbo loans and can successfully meet the unique needs of jumbo borrowers who often have more complex finances than other borrowers,” says Glenn Brunker, president of Ally Home.
- Get your credit and cash in pristine shape before applying: The best way to score a deal on a jumbo mortgage — or any mortgage, for that matter — is to show that you’re a low-risk borrower. While you might be able to get approved for a jumbo mortgage with a lower down payment and a credit score around 700, you won’t be rewarded with the best rate possible. Before you apply, take steps to get your credit in the excellent category (at least 740), and save up to make a sizable down payment. Additionally, pay down debt to shrink your debt-to-income (DTI) ratio.
- Look for a mortgage broker: Instead of doing all the comparison-shopping on your own, consider working with a mortgage broker who specializes in jumbo loans. You’ll have to pay for the service (usually by way of a costlier loan, not an out-of-pocket charge), but this route can help you uncover deals that are well worth the money.