What is a Jumbo Loan in California?
September 29, 2022
California is known for a lot of things: Hollywood, The Golden Gate Bridge, Silicon Valley, and beautiful national parks. The state is also known for being one of the most expensive states to live in. The average home price in California is $775,876 which is more than the average home price in the country by over $300,000. Jumbo loans are very important to learn about if you are considering living in California.
Jumbo loans are used to provide financial backing for certain properties that are considered too expensive for a traditional mortgage. In this blog post, we go through what a California jumbo loan is and how you can get one.
What is a Jumbo Loan?
Jumbo loans are mortgages that finance the purchase of properties that have a price that exceeds the mortgage limits set by Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are government-sponsored agencies that buy most mortgage loans from lenders to reduce the risk for lenders to provide loans.
Jumbo loans are mortgages with a larger than the normal loan amount. They are also called non-conforming loans because they are not secured by Fannie Mae and Freddie Mac.
If a borrower defaults on a jumbo loan, the lender is not protected from loss by the government. Jumbo loans are seen as a riskier investment for lenders which means that there will be stricter qualifications to get accepted for a jumbo loan than with a conforming loan.
Jumbo Loans vs Conforming Loans
Fannie Mae and Freddie Mac set the parameters for what types of loans they will buy from lenders. Among these parameters is the loan limit which is the maximum mortgage loan amount that the government agencies are willing to buy. The loans that follow the parameters are known as conforming loans.
Properties that exceed the conforming loan limit will need a jumbo loan because they are not limited by Fannie Mae or Freddie Mac, and do not follow their requirements. Jumbo loans are mortgages with a loan amount that is larger than the conforming loan limit.
They are also called non-conforming loans because they are not secured by Fannie Mae and Freddie Mac. If a borrower defaults on a jumbo loan, the lender is not protected from loss by the government. Jumbo loans are seen as a riskier investment for lenders which means that qualifying for a jumbo loan can be more difficult than with a conforming loan.
Conforming Loan Limits For Single Family Homes
The conforming loan limit can vary by county depending on the state. In California, the loan limit varies from $647,200, which is the limit for most counties in the country, and $970,800 in areas where the properties are more expensive.
Any property that costs more than $647,200 will need a jumbo loan in order to finance it. Although, most counties along the California coast and in the Bay area have a loan limit of $970,800.
You can check out JVM Lending to see the loan limits for any zip code. There are even counties in California where the average home purchase price is over $970,800 like in Berkeley.
California Jumbo Home Loan Interest Rates
Jumbo loan interest rates change by the day just like conforming loan interest rates. According to US Bank, the average conforming loan interest rate for a 30yr fixed loan is 5.875% with a 6.045% APR. The average jumbo loan for a 30yr fixed mortgage is 5.375% with a 5.514% APR.
Pros and Cons of California Jumbo Loans
Jumbo loans can come in handy if you’re looking to purchase an expensive home but they also have drawbacks that should be noted. Here are the pros and cons of getting a jumbo loan in California.
Pros of Jumbo Loans in California
Can take out a bigger loan. The first benefit of jumbo loans is of course that you’re able to finance a more expensive property.
Lower Down Payment. Conventional banks typically require borrowers to pay a 20% down payment to avoid paying Private Mortgage Insurance in a monthly payment. This protects the lender in case the borrower defaults on the mortgage. Jumbo loans, however, have stricter qualifications for borrowers which means that anyone who is accepted for a jumbo loan will be seen as less of a risk and will have ample proof to back it up. Because the lender has more confidence in their borrowers, they may be willing to allow a 10% or 5% down payment in some cases. Of course, even though the down payment is lower, the overall amount is higher so you still may be paying more than on a conforming loan.
Competitive interest rates. Jumbo loans can offer competitive interest rates depending on the market. The current climate for jumbo mortgage interest rates is lower than the average conforming loan in California which makes this an opportune time to get a jumbo loan.
Strict But Flexible Parameters. Being tied to Fannie Mae or Freddie Mac means that you have to follow their guidelines for things like loan limits, qualifications, and down payment requirements. Jumbo loans are not backed by either government agency which means that the lender can be more flexible with their requirements. While you’ll still need to meet certain standards, the guidelines may be able to be shaped to your specific circumstance.
Cons of California Jumbo Loans
Reduced Tax Benefits. You can deduct the mortgage interest you pay on your taxes for both conforming and jumbo loans but the amount you can deduct is capped at $750,000. That may not be an issue for most people but it’s something to keep in mind.
Rigorous Approval Process. As stated previously, jumbo loans are not protected by the government and lenders are at risk of loss if a borrower defaults. Therefore, lenders have a more strenuous approval process for jumbo loans. They’ll look at your credit score, employment history, and debt-to-income ratio more closely than they would for a conforming loan.
Jumbo Loans Are Not For Every Property. Since the 2008 housing crisis, lenders prefer to give out jumbo loans for personal residences instead of investment properties. The reason why is that borrowers will be more likely to default on an investment property loan rather than a home that they are living in. Jumbo loans also require an appraisal like any other loan and if that appraisal comes in lower than what the property is actually worth, the loan won’t be approved for the full amount.
The Qualifying Factors For Jumbo Loans in California
The qualifications for jumbo loans are not as straightforward as they are for conforming loans. They can be stricter and more in-depth because the lender is taking on more risk. With that being said, here are some of the general qualifications you’ll need to get a jumbo loan in California.
Need an Emergency Fund
Lenders often look at the cash reserves of potential borrowers, which is ideally enough to last anywhere between 6 to 12 months.
Jumbo loans require a credit score of at least 720 in order to qualify. This is higher than the 620 credit score that’s needed for a conforming loan but it’s still achievable for many people.
The amount of debt you have and how it compares to your income is always considered with mortgage lenders. For jumbo loans, lenders prefer a DTI of 36% or lower with a hard cap at 45%.
Mortgage lenders typically want to see documentation like bank statements, tax returns, W-2s, 1099s, and more when borrowers apply for loans. For Jumbo loans, they may ask for more documentation to get a more accurate picture of your finances.
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