Jumbo loans are an attractive option for individuals looking to purchase a more expensive home. With limits on conforming loan amounts, these mortgages offer buyers more flexibility with larger loan balances. However, borrowers must typically meet stringent guidelines as these loans represent higher risk to the lender. Understanding the credit requirements associated with jumbo loans is key to successful navigation of the buyers’ journey.

A jumbo loan can also refer to mortgages with loan amounts above the conventional loan limit set by the Federal Housing Finance Agency as of 2021. It is $548,250 in most areas and up to $822,375 in certain high-cost areas of the United States. The loan limit for two-unit properties is $702,000 in most areas, increasing to $1,053,000 in high-cost areas.

Jumbo loans are non-conforming mortgages that can’t be sold or securitized to Fannie Mae or Freddie Mac. In these cases, the lender retains the mortgage and must package, manage and service the loan itself. This can make it more expensive for borrowers to obtain a jumbo loan than a Fannie Mae or Freddie Mac loan.

For borrowers with strong financials, jumbo mortgages can offer competitive rates and terms. Lenders are looking for borrowers with a low debt-to-income (DTI) ratio and excellent credit scores. Average jumbo mortgage interest rates tend to be competitive with traditional loans but the down payment requirements are usually higher. Generally, a jumbo loan requires a down payment of at least 10 to 15 percent of the purchase price. Some lenders also have different eligibility requirements for jumbo loan borrowers, such as shorter repayment terms and higher personal reserves.

Despite having higher down payment requirements and stricter credit standards, many borrowers feel the benefit of jumbo loans is worth the added expense. Whether you’re a first-time homebuyer looking to purchase a higher-priced home or an experienced homeowner looking for more real estate, a jumbo loan can help you finance the purchase.

Jumbo loans are a good option for individuals looking to purchase a more expensive home than what is traditionally offered through a conventional loan. By understanding the credit requirements associated with jumbo loans and the lender’s risk, borrowers can rest assured that they are making the right decision for them when it comes to financing their dream home.