Jumbo loans in California 2023

India Kinchelow

4 min read

Updated: Jul 15, 2023

If you're in the market for a home that exceeds the standard loan limits, a jumbo loan may be the answer you're searching for. But what exactly is a jumbo loan? In this article, we will thoroughly explore the specifics of jumbo loans, such as their requirements, limitations, and other relevant details. So, if you're ready to delve into the world of jumbo loans, keep reading!

When Does a Homebuyer Need a Jumbo Loan in California in 2023 and beyond?

A person may need a Jumbo loan when they want to finance a home that exceeds the conforming loan limits. The most common conforming loan limit for 2023 in California is $726,200. If the mortgage amount is larger than this limit, then a Jumbo loan is necessary.

Conforming loan limits are set on a regional basis by the Federal Housing Finance Agency (FHFA). The FHFA compiles and evaluates housing market data from across the United States and determines the average national home prices. Based on this data, they establish the maximum loan limits for each region.

In higher priced counties, such as Los Angeles County, the conforming loan limit can go up to $1,089,300. It is important to note that the loan amount, not the property value, determines whether a Jumbo loan is needed.

For example, if a person puts a $100,000 down payment on a home appraised at $500,000, the loan amount would be $400,000, which is below the conforming loan maximum. In this scenario, a conforming loan would suffice, and a Jumbo loan is not necessary.

What are the requirements of Jumbo loans?

To get approved for a jumbo loan, borrowers need to meet certain requirements due to the higher loan amount and associated risks for lenders. Here are the key requirements:

High Credit Score: Lenders will review your credit score to assess your financial responsibility. A high credit score helps demonstrate your ability to handle the loan. Typically, a credit score of 680 or higher is required for a jumbo loan.
Low Debt-to-Income Ratio (DTI): Your DTI ratio compares your gross monthly income to your outstanding debts. Lenders want to ensure that you can make mortgage payments, even during financial hardship. Generally, a DTI ratio of 38% to 43% is required for jumbo loans, although this can vary.
Good Cash Reserves: Lenders will ask for proof that you have sufficient cash reserves to cover mortgage payments for a certain length of time, typically 6-12 months. You may need to show bank statements to demonstrate your financial stability.
Documentation of Income and Assets: Lenders will require documentation to verify your income and assets. This includes providing annual tax returns, W-2s, pay stubs, and bank statements. Self-employed individuals may need to provide profit/loss statements and balance sheets.

It's important to note that these requirements can vary among lenders, and additional factors may also be considered. It's advisable to consult with a mortgage professional who can guide you through the application process and help find the best terms and rates for your jumbo loan.

What are the advantages and disadvantages of jumbo loans in California?

Jumbo loans can offer several advantages for homebuyers in California, especially in high-cost areas like Los Angeles and San Francisco. These advantages include:

Higher loan limits: Jumbo loans allow borrowers to purchase homes that exceed the loan limits set by Fannie Mae and Freddie Mac. This means that homebuyers can access more funding to purchase their dream homes in California's expensive housing market.
Lower down payment options: While conventional mortgages typically require a 20% down payment, jumbo loans can allow for smaller down payments. Some lenders may offer jumbo loans with as little as 5% or 10% down payment, making it easier for buyers to enter the California housing market.
Competitive interest rates: Despite being larger-value loans, jumbo loans can sometimes offer lower interest rates compared to conventional loans. This is because some lenders keep these loans on their books instead of selling them, which adds to their bottom line. Additionally, lenders may be more selective in lending to reduce their risks while competing for the best clients.
More flexible terms: Jumbo loans are not tied to Fannie Mae, Freddie Mac, or other wholesaler restrictions. This gives lenders more leeway in offering personalized options to borrowers, such as fixed-rate mortgages of 15-30 years or adjustable-rate mortgages with fixed periods of 3-10 years.

There could also be some disadvantages to consider when opting for jumbo loans as well. Stricter eligibility requirements and higher closing costs and fees are the most common disadvantages with most lenders. However, a lender who specializes in Jumbo Loans will offer competitive financing option with minimal fees.

The biggest limitation to jumbo financing is found in the types of eligible properties. Not every property will qualify for a jumbo loan. Lenders will have specific criteria and restrictions, such as no second homes, foreclosures, or short-sale homes. Borrowers must ensure that their desired property meets the lender's requirements.

Conclusion

Ultimately, whether jumbo loans are advantageous or not depends on the individual's financial situation, creditworthiness, and their specific needs in the California housing market. It is essential to evaluate all the pros and cons and consult with a loan professional to make an informed decision.