Non-conforming (jumbo) loans exceed loan limits set by the FHFA and are used to finance high-cost homes.

A non-conforming loan, aka jumbo loan, is used to finance a high-cost or luxury home that exceeds federal loan limits set annually by the Federal Housing Finance Agency (FHFA). This loan is ideal for those who have excellent credit, high income, and are interested in obtaining a home loan that exceeds said limits. Similar to conforming loans, borrowers also have the opportunity to negotiate for a better mortgage. You can use this type of loan to finance a primary home, vacation home, and investment property.

Conforming vs. Non-conforming (Jumbo) Loans

Jumbo loans come with their own set of underwriting requirements and tax implications. Unlike conforming conventional loans, they are not guaranteed by the government-sponsored enterprises, Fannie Mae and Freddie Mac. In other words, the lender is not protected from losses if a borrower defaults. Jumbo loans tend to carry higher interest rates than conforming loans, generally between 0.25% to 0.75% greater. They are often scrutinized by other financial institutions that have more risk. That said, borrowers must undergo more rigorous qualification requirements.

Non-conforming (Jumbo) Loan Limits

There are no loan limits for jumbo loans. To determine whether you’ll need a jumbo loan depends on the loan amount and county. For example, if you’re looking to finance a single-family home for $750,000 in Buffalo, NY (Erie County), you’ll take on a jumbo loan because it’s in a “standard area” and does not fall within the conforming loan limits. Whereas, if you’re looking to finance a single-family home for $750,000 in Manhattan, NY (New York County), you’ll take a conforming loan because it’s considered a “high-cost area” and falls within the conforming loan limits. See chart below.

FHFA 2022 Conforming Loan Limits

The Federal Housing Finance Agency (FHFA) publishes new conforming loan limits annually. They vary by state, district, or territory and number of units. The baseline limit is $647,200 for most counties in the United States for 2022. You can find your counties’ loan limit here.[wptb id=2585]

What are the Minimum Requirements for a Non-conforming (Jumbo) Loan?

Credit Score

To obtain a non-conforming loan or jumbo loan, you must have a credit rating of at least 700 to finance a one or two-unit family home. And 740 to finance a three and four-unit family home. Those with a lower rating either may not qualify or take on this loan at a much higher interest rate. Learn how you can improve your credit rating here.

Cash in Reserves

You’ll need at least six months’ worth of monthly mortgage payments otherwise, known as PITI (principal, interest, taxes, and insurance), to finance a single-family home. However, it’s not uncommon to see lenders require at least 12 months’ worth of cash reserves.

Common Cash Reserves Sources for a Non-conforming (Jumbo) Loan

• Checking account
• Savings account
• Money market account
• Treasury Bills
• Certificates of deposit
• Stocks that can be liquidated
• Bonds
• IRS tax refunds
• 60% of the balance from your 401K, IRA, thrift savings plan, or Keogh account

The following cannot be used as cash reserves for a non-conforming (jumbo) loan: gift funds, another property’s equity, borrowed funds, cash obtained via cash-out refinance, incidental cash received at closing, and seller contributions.

Down Payment Requirements and Loan-to-Value

Your down payment requirement is based on the number of units, credit score, and home loan amount. It can be as low as 5% and high as 20% for single-family homes. Since lenders are taking the risk of issuing you a loan, they tend to require a larger down payment. Your down payment and loan-to-value (LTV) ratio have an inverse relationship. So if your down payment is 10%, your LTV is 90%.

Debt-to-Income Ratio

Your debt-to-income (DTI) ratio consists of two numbers, your housing, a.k.a. front-end ratio, and your debt, a.k.a. back-end ratio. The former representing your proposed monthly mortgage payment, otherwise known as PITI, and the latter representing your front-end ratio added to your current payment obligations. You can learn what goes into calculating your DTI here. You can have a back-end DTI as high as 45% for a conforming loan.