What Is a Jumbo Loan, and When Do Davis County Buyers Need One?

A jumbo loan is a mortgage that is larger than the conforming loan limit. The conforming limit is a dollar figure set each year by the Federal Housing Finance Agency for loans that Fannie Mae and Freddie Mac can buy. A loan above that figure is a jumbo, and the lender keeps the risk differently, so the rules can be tighter.

I am not quoting this year's limit here, because it changes annually and varies by county. Check the current figure for Davis County with your lender before you shop. Whether you need a jumbo comes down to one comparison: the loan amount you need against that limit.

Charisse Walker is a real estate agent with Chalker Properties Group in Salt Lake and Davis County, Utah, and a licensed mortgage lender. This article is general education and is not a loan offer or a commitment to lend.

Take the purchase price and subtract your down payment. If the result is above the conforming limit for the county, you are in jumbo territory. If it is below, a conforming loan is likely available.

A larger down payment can bring a loan under the limit. For example, a buyer who is close to the line might decide to put more down to stay in a conforming loan. The tradeoff is cash. Whether it is worth it depends on the rates and terms available to you on the day you compare, so get both quotes in writing.

Jumbo lenders set their own guidelines, so terms differ from lender to lender. In general, buyers should expect to see more of the following, but confirm with the lender you use:

• A larger down payment. Some jumbo programs ask for more than a conforming loan does.
• Higher credit expectations. Lenders often want stronger credit scores for large loans.
• Cash reserves. Many jumbo lenders want to see months of mortgage payments in savings after closing.
• More documentation. Tax returns, statements and verification may be reviewed in more depth.
• A second appraisal in some cases. This depends on the lender and the loan size.
• Different pricing. Rates may be close to conforming rates or not. Compare them on the day you apply.

None of this is meant to scare you. It is meant to help you gather documents early.

1. Find the current limit. Ask your lender for the conforming limit for Davis County.
2. Decide your price range and down payment. Work out the loan amount you would need at the top of your range.
3. Get quotes for both loan types. If your loan is near the limit, ask for a conforming quote with a bigger down payment and a jumbo quote with a smaller one.
4. Gather documents early. Pay stubs or business records, tax returns, bank and investment statements, and details on any other property you own.
5. Check your reserves. Look at what you will have left after the down payment and closing costs.
6. Get pre-approved before you tour. The seller will want to see a letter that matches the price you are offering.

When a buyer offers on a higher-priced home with a jumbo loan, the seller's side wants to know the loan will close. A pre-approval from a lender with a record on jumbo loans helps. So does a down payment that is clearly documented and a plan for the appraisal.

The appraisal matters more on a larger loan. If the appraisal comes in under the price, you need a plan: renegotiate, bring more cash or walk away if your contract allows it. Read how to handle a low appraisal in Utah before you write the offer.

• Assuming the limit is the same everywhere. It varies by county and changes each year.
• Waiting to gather documents until after the offer is accepted.
• Forgetting the reserve requirement when planning the down payment.
• Comparing only the rate, and not the fees and points.
• Not asking for a conforming quote with a larger down payment as a comparison.
• Applying with several lenders over a long period. Ask your lender how multiple credit checks in a short window are treated.

This is a typical example, not a client story. A buyer looking in Davis County finds a home priced above what they first imagined. After their down payment, the loan comes out just over the conforming limit. They ask a lender for two quotes: a jumbo with the down payment they planned, and a conforming loan with a larger down payment. They compare the monthly payment, the cash needed at closing and the reserves left. The buyer chooses the option that leaves a cushion for repairs.

Another buyer in the same position would choose the other way. The numbers and your comfort with cash decide.

Start with your credit report. Pull your reports from the three bureaus, check for errors and pay down revolving balances if you can. Lenders look at the full picture, and a clean file helps on a larger loan.

Next, organize your documents. If you are salaried, that means recent pay stubs, W-2s and bank statements. If you are self-employed or have several income sources, expect to provide tax returns and business records. Having them in one folder before you apply can save you days.

Then plan your cash. List the down payment, closing costs, any prepaid items and the reserves the lender will want. Do not move large sums between accounts without documenting where they came from. Lenders ask about large deposits, and a clear paper trail saves questions.

Finally, avoid new debt. Do not finance a car, open new credit cards or change jobs without talking to your lender first. Read how much house you can afford in Utah to see how your payment fits your budget.

Ask for a Loan Estimate from each lender on the same day, for the same loan amount and the same loan type. Compare the interest rate, the annual percentage rate, the points, the lender fees and the estimated cash to close. A lower rate with higher points is not necessarily cheaper over the time you plan to keep the loan.

Ask how long the rate lock lasts and what it costs to extend. Ask how the lender handles an appraisal that comes in low. Ask who you will talk to if something comes up at the last minute. The answers tell you how the process will feel as much as the rate does.

A larger loan magnifies small differences. Even a small difference in rate or fees adds up over the life of the loan, so take time to compare. I would rather you spend an extra afternoon on this now than find out later.

Is a jumbo loan the same as a high-balance loan?
No. In some counties, a higher conforming limit applies. Loans above that are jumbo. Ask your lender which limit applies to Davis County.

Can I use FHA or VA for a large loan?
Those programs have their own limits and rules. VA rules differ for veterans with full entitlement, so ask your lender.

Do I need mortgage insurance on a jumbo?
It depends on the down payment and the lender. Ask for it in writing.

How much cash should I have in reserve?
Lenders set their own requirements. Ask your lender how many months of payments they want to see.

Can I get pre-approved before I find a home?
Yes, and it is a good idea. It tells you your range and shows sellers you are serious.

Charisse Walker is a real estate agent with Chalker Properties Group in Salt Lake and Davis County, Utah, and a licensed mortgage lender. If you are buying a larger home in Davis County, start with the basics on how to get pre-approved for a home loan in Utah and our buying a home page. Or contact Charisse to talk about your numbers.