Navigating Jumbo Loans in High-Cost Areas: A California Perspective

California is renowned for its sunny weather, laid-back culture, and beautiful landscapes, but it’s also a costly place to live. The average property value in California can be close to $800,000 or more, meaning that many who want to buy an excellent property will need a larger mortgage loan than what Fannie Mae and Freddie…

Written by

Tyler Arnaiz

Published on

September 30, 2024

California is renowned for its sunny weather, laid-back culture, and beautiful landscapes, but it’s also a costly place to live. The average property value in California can be close to $800,000 or more, meaning that many who want to buy an excellent property will need a larger mortgage loan than what Fannie Mae and Freddie Mac will purchase for the secondary mortgage market.

This article will explore the purpose of a California jumbo loan, how conforming loan limits factor into what makes a jumbo loan, and how to qualify for excellent rates if you need a jumbo loan.

Why Buyers in High-Cost Areas Need Jumbo Loans?

Jumbo mortgages are outstanding for buyers seeking homes well above the median home price in a given area. This could include those buying high-value investment properties or high-income individuals who simply want a more luxurious property than possible with a smaller mortgage.

California is known for being very expensive, even for a modest home. While the FHFA does attempt to provide limits that match the housing market, these limits may not be enough to afford a great property in a good area. As such, a jumbo mortgage can make these high-value purchases possible.

A jumbo loan is designed for well-qualified buyers with a higher credit score, significant cash reserves, and a steady financial situation.

Conforming Loan Limit in California

Jumbo loans are considered non-conforming mortgage loans, meaning they do not meet the loan limits set by the Federal Housing Finance Agency.

Conforming conventional loans can be bought by government-sponsored entities, such as Fannie Mae and Freddie Mac, and resold as bundled mortgage loans. A non-conforming loan is considered too risky for these government entities and is carried only by the jumbo lender.

By restricting the secondary mortgage market to conforming loans, the FHFA reduces market risk and prevents shocks such as during the 2008 financial crisis.

Federal Housing Finance Agency (FHFA)

The Federal Housing Finance Agency (FHFA) is a regulatory body formed after the 2008 housing finance crisis, meant to oversee the activities of the government-sponsored entities Freddie Mac and Fannie Mae.

One of its primary roles is to ensure that these entities are not purchasing overly large loan amounts that may be more susceptible to foreclosure, which could cause cascading effects throughout the mortgage industry.

This is achieved by establishing an FHFA conforming loan limit for every county in the US. This loan limit ranges from $766,550 to $1,149,825 for a one-unit property, depending on the average house value in that area. The loan limits in many California areas, such as San Francisco and Los Angeles, are $1,149,825 because the property is expensive.

Any home loan above the loan limit in the given area will be considered a jumbo loan, so if you want to buy a property above this amount, you’ll need to turn to jumbo lenders.

Qualifications for Jumbo Loans in California

Because a mortgage lender cannot repackage and resell a jumbo loan, loan approval is more complicated. As such, you must ensure your finances are in excellent shape before you qualify.

Stricter Credit Score Requirements

While you can achieve a conforming loan with a credit score of just 620, you’ll need a better score if you want a jumbo loan. Generally, you should expect a score of at least 700, but many lenders will want at least 720.

Larger Down Payment Expectations

Because jumbo loans are riskier than other loan options, lenders will want larger down payments. You will almost always have to put down 10% at the bare minimum, but most jumbo loan lenders want at least 20%.

On the plus side, a 20% down payment will eliminate the need for private mortgage insurance.

Closing costs for jumbo loans are about the same percentage as for a smaller loan, but because the loan amount is more, this cost will be higher, too.

Debt-to-Income Ratio (DTI)

To qualify for a jumbo loan, you typically need a debt-to-income ratio of 43% or less. This means that only 43% of your gross monthly income goes to debt services, like credit cards, student loans, and other financing. This is a lower DTI threshold than for conforming conventional loans, where you have a bit more flexibility.

Proof of Income

As jumbo loans are riskier, lenders want to see that you can easily afford all home expenses, including property tax, homeowners insurance, and mortgage payments. You should expect to provide income documentation, including bank statements and a list of all your assets.

Some jumbo lenders also require you to provide at least six months of cash in reserve to cover your loan amount if you encounter financial problems. Expect to be asked many questions about your sources of income and provide additional documentation throughout underwriting, including detailed reports of any investment accounts and liquid assets you may have.

Challenges of Jumbo Loans in California

While a jumbo loan can give you access to more luxurious properties than are possible with other loan types, it is crucial to recognize its downsides.

Higher Monthly Payments

Because jumbo loans are much larger than those within the conforming loan limit, they come with larger monthly payments. This is part of why they are riskier, as any fluctuation in your income may make it difficult to pay your mortgage.

Appraisal Issues in High-Value Markets

Most lenders expect at least two appraisals for a jumbo loan, as they want to ensure that they are not offering higher loan amounts than is strictly necessary.

They will also want more detailed inspections to assess if any significant issues with the home may imperil its value.

Limited Lender Options

A jumbo loan is a specialized product only available from some lenders, meaning you will have fewer options. This makes it all the more important to scrutinize your lender and ensure that you work with a reputable company.

At Arnaiz Mortgage, we are committed to ensuring that you find the right mortgage product for your specific goals. We offer multiple loan products that can help you finance your dream home.

Strategies for Success with a Jumbo Loan in California

Going above the conforming loan limits requires a deep knowledge of the purchase process and a strong borrowing profile. Consider these tips to ensure a tremendous jumbo loan experience.

Time Your Purchase Strategically

The housing market changes significantly over time, which includes interest rates. As these high-value products are riskier, they are also more vulnerable to market fluctuations.

Pay close attention to the market to get the best jumbo mortgage rates and not overpay for your preferred home. Observe changes in housing values, seeking out times when it’s a buyer’s market in your area. While national trends can be useful, local projections and forecasts are generally more helpful, especially in expensive places like California.

If you know you’ll soon be in the market for a jumbo mortgage, read up on real estate professional projections about mortgage trends to know when rates may drop quickly. You’ll also want to leverage rate locks to secure the best rate.

The California Association of Realtors can be a great help as you decide whether it’s time to buy, as they release quarterly reports and frequently aggregate reports about home sales in given markets.

Explore Adjustable-Rate Mortgages (ARMs) with Caution

An adjustable-rate loan is a loan that has a low introductory interest rate, but the interest rates will automatically recalibrate as the market changes, usually after 5 or 7 years. This can be an attractive option for some buyers, especially if jumbo loan rates are much higher than conforming.

However, you may be better off choosing a fixed-rate jumbo loan, as interest rates may fluctuate dramatically within a few years. If you choose an adjustable-rate loan, note its cap interest rate, which is how high the interest rates can go depending on the current market rate.

Maximize Your Down Payment

Having a sizeable down payment is beneficial for any loan, but it’s significant for a jumbo loan, which will have a larger principal in the first place. The more you put down, the less you will pay in interest over time because you will have a small principal. Additionally, it will give you a lower DTI, which can help you secure better rates.

Even if it’s possible to secure a jumbo mortgage with just 10%, you should aim for 20% down if feasible, as this gives you a better chance of getting reasonable rates and paying less over time.

Summary

Conforming loans may not provide the amount needed to secure a great property in an expensive area like California, which makes jumbo mortgages a great choice for those wanting to purchase in this state.

However, going above loan limits comes with additional challenges, including fewer options, higher payments, and further scrutiny of your finances and the property. If you are seeking a jumbo mortgage, it’s essential to think strategically, including creating a strong financial profile, saving up to put more down, and researching mortgage companies carefully to ensure you are going with a good company.

Arnaiz Mortgage is here to help you throughout your home purchase journey. We offer multiple mortgage types and will work with you to decide which option best suits your needs. Additionally, we offer competitive rates that will help you save money throughout the life of your mortgage.

To learn more about whether a jumbo mortgage is the right product, get a free quote online or schedule a free consultation with an experienced professional.

Jumbo Loans California Frequently Asked Questions

What Is the Jumbo Loan Limit in San Francisco?

The jumbo loan limit in San Francisco County is $1,149,825 for 1-unit properties.

What Is a Jumbo Mortgage Amount in Los Angeles?

A mortgage loan above $1,149,825 for a one-unit property in Los Angeles County is considered a jumbo loan.

How Big Can a Jumbo Loan Be?

The lender sets jumbo loan limits. What loan amount you can receive depends on your down payment, FICO score, and other qualifications. The maximum jumbo mortgage loan is between $2 million and $3 million.

Can You Put a 10% on a Jumbo Loan?

Most lenders require at least 20% upfront for a jumbo loan, though depending on your overall financial profile, you may be able to put only 10% down.