Housing prices rise and fall over time. When this happens, the Federal Housing Administration (FHA) along with the Federal Housing Finance Agency (FHFA) establishes new limits for conforming loans as well as FHA loans. When housing costs and home values rise, the loan limits rise to ensure that homes remain affordable for residents in every U.S. county.
Because home values rise and fall at different rates in different areas throughout the country and there are mitigating factors affecting home values in different, areas, the limits are different across the country. These valuations are conducted on a county by county basis. The year 2020 brings with it higher loan limits in all but 43 counties nationwide according to a recent FHFA press release.
Loans that fall below the loan ceiling for any particular county and meet other criteria, including a credit score of 620 or better, are considered conforming loans. The ceiling for most U.S. counties in 2020 is $510,400. This is a significant increase over 2019’s ceiling of $484,350. Come counties, with higher than average home prices have higher conforming loan limits of up to 150 percent of the standard maximum loan amount.
What is an FHA Jumbo Loan?
On occasion, buyers need more than the standard conforming FHA loan limit. These loans that go beyond the standard maximums for FHA loans are known as Jumbo FHA Loans. While the interest rates on Jumbo FHA loans are similar to what borrowers will experience with conforming loans (loans that fall within the normal acceptable price range for FHA loans), there are stricter qualifications involved in addition to requirements for higher down payments with these “oversized” loans.
Essentially, a jumbo loan is any loan that exceeds the limits of the standard FHA loan. This offers well-qualified buyers the opportunity to own homes outside the standard loan limits. A necessity in some areas of the country where real estate comes with premium price tags. This also helps to make the dream of homeownership available to an even wider group of the population.
How do FHA Jumbo Loans Differ from a Conforming FHA Loan?
The FHA Jumbo loan has the same restrictions as a typical FHA loan. That means the “no cash back” requirement is still in place. You can’t use a jumbo FHA loan to leave the closing table with cash in your pocket just as you can’t with a traditional FHA loan. The big difference between the two comes in the limits of the loan. FHA jumbo loans approve for considerably more than the standard FHA home value limits for financing.
If you anticipate needing down payment assistance, however, this is not the loan for you. It isn’t allowed with this loan. You’ll need a full 20 percent of the borrowed amount to qualify for most FHA jumbo loans.
FHA Jumbo Loan Requirements
Many requirements are similar for the FHA jumbo loan and other types of FHA loans. However, there are a few differences borrowers need to understand. These are a few of the loan requirements borrowers will face when attempting to secure an FHA jumbo loan:
- Minimum credit score of 620. That is the minimum established by the FHA. Some lenders require even higher FICO scores for these oversized mortgage loans.
- Larger down payment than FHA conforming loans. And there is no access to down payment assistance. Plus, FHA loans require MIP (mortgage insurance premiums) for the life of the loan.
- Higher interest rates. This isn’t always the case. Because you’re paying a higher down payment and provide so much additional documentation, some lenders charge interest rates similar to those of conforming loans.
- Proof of cash reserves sufficient to cover one year of mortgage payments.
- Satisfactory debt-to-income ratio. Some lenders require a DTI of no more than 45 percent.
- At least one additional appraisal of the home’s value.
- Substantial documentation of your ability to pay. This may include additional years’ worth of tax returns, bank statements, and even information about your investment accounts.
- Don’t forget the potential for additional costs at the closing table with the FHA jumbo mortgage loan. This is often the case because of all the additional steps involved.
Most homes so far outside the limits of conforming loans for an area are designed to attract buyers who are likely to have the higher credit scores and assets necessary to secure these types of loans. Lenders simply wish to confirm you have the means to handle these types of loans before offering them.
Benefits of an FHA Jumbo Loan
The benefits of an FHA jumbo loan are fairly easy to see for people who have champagne tastes. But they aren’t the right loans for those living on beer budgets. You’re going to need to come to the table with a substantial amount of cash and plenty of proof of your ability to pay to make these loans happen. However, there is at least one massive benefit you get when you consider an FHA jumbo loan. That is the benefit of getting the house you want even if the price is above the limit for conforming FHA loans.
Another potential benefit to consider with the FHA jumbo loan is that while it usually has a higher interest rate than a conforming FHA mortgage loan, it is often lower than the interest rate on a conventional jumbo loan. One thing to note, though, that may change how you feel about this is the issue of MIP. With conventional jumbo loans, you can apply to be released of private mortgage insurance (PMI) payments once you’ve achieved at least 20 percent equity in your home. MIP is a lifelong commitment when you have an FHA jumbo loan.
Considerations Before Diving into an FHA Jumbo Loan
Unfortunately, there are plenty of considerations to keep in mind before you dive right into an FHA jumbo loan. You may be better served for a convention, non-government backed, loan instead of an FHA loan. This is especially true since many of the benefits associated with FHA loans (lower down payments, ability to seek down payment assistance, lower interest rates, and lower credit score qualifications) are not available with the FHA jumbo mortgage loan.
It may be in your best interest to compare your options between conventional jumbo mortgages and government-backed options to see which one truly offers the best terms for your needs. It might even be worthwhile to explore options with several lenders of both types for a big picture idea of which one works best for you.
Who Needs an FHA Jumbo Loan?
People who are sure they want to go the FHA route or feel they will have difficulty getting approved for conventional jumbo mortgage loans might prefer to go the FHA route for their loans. And some people may shave a point or two off their interest rates by doing so. It can be completely relative according to lenders, qualifications, and how well the economy is doing at the moment.
Currently, it is a buyer’s market with lower interest rates all around and lenders love to see that. If you can manage that along with the other stiffer requirements for receiving a jumbo loan, then this might be the perfect answer for you. If you don’t need these things, then you might fare better with a traditional or conventional jumbo mortgage.
Qualifying for an FHA Jumbo Loan
Qualifying for an FHA jumbo loan is fairly straight forward. People who have the following, often qualify for these larger mortgage loans with little trouble.
- Sufficiently high credit scores.
- Large enough down payment.
- Sizable cash reserves.
- Adequate documentation of income and wealth.
- Low debt-to-income (DTI) ratio.
- Enough cash to pay closing costs (some recommend three percent of the amount borrowed while others suggest closer to five percent to handle contingencies and surprises).
The key to remember is that you must meet all the qualifications necessary for a normal conforming FHA loan plus a few additional qualifications to secure an FHA jumbo loan. It isn’t always easy to gauge who will or will not qualify at first glance.
Also, don’t lose sight of the fact that some homes won’t qualify for the FHA jumbo mortgage. The home must be in acceptable condition for the FHA to consider extended credit for the home. Plus, the home must be located in an area that accommodates higher prices and the loan must still be within the price limits for jumbo loans in that area. Most importantly, most lenders require at least two appraisals on the home that confirm the value.
Is an FHA Jumbo Loan Right for You?
FHA conforming loans and jumbo loans certainly have their places in the world of modern lending. That doesn’t mean they are the right loans for all home buyers. In fact, some home buyers are better served with different types of mortgage loans. The higher requirements of FHA jumbo mortgage lenders make this a less likely loan option for people who have less than excellent credit, even though the FHA allows these loans for low-income households.
The reality is that people who have high debt-to-income ratios, low incomes, and little money squirreled away to cover expenses for at least one to three months, if not longer, are not well served by jumbo loans unless they’ve recently come into quite a bit of cash to enhance their status in the eyes of lenders. When this occurs, fortunes can change and less attractive borrowers, suddenly become far more appealing to lenders – even those who have been burned before.
Because the loan limits vary by region, it is a good idea to get the scoop from your local FHA facility as to what the limit for FHA jumbo loans in your county may be. This will help keep your expectations in check during the house-hunting process so you do not, inadvertently, set your sites on a home that is out of range for even jumbo loans if you need the benefits of an FHA loan.
In a perfect set of circumstances, such as having an excellent credit score (720 or better), a DTI of 40 percent or less, large cash reserves, liquid assets, and piles of documentation showing your fitness for an FHA jumbo loan; this may be your ideal loan type for the meager savings on interest rates it provides. However, it is worth a little extra time and attention to explore your options and see if you can get even better terms elsewhere.
Now is the perfect time to test the water to see if an FHA jumbo loan is the right choice for you and your family as you explore your home buying options. But it never hurts to see if other loan options may serve you better.