California is well-known for its high cost of housing — the average home costs $793,600, which is far above the national median home price. As such, many homeowners find that the maximum amount for a conforming mortgage is too low to afford their dream home.
Fortunately, there’s the option of a jumbo loan, which goes above the conforming loan limits set by the Federal Housing Finance Agency (FHFA). These mortgage loans allow borrowers to obtain a higher loan amount, but they have stricter qualifications and higher interest rates.
Today, we’ll explore everything you need to know about a jumbo loan in California so you’re confident in your financial decisions throughout the home-buying process.
What Is a Jumbo Loan in California?
Jumbo loans are loans that allow a borrower access to loan amounts that are above conforming loan limits.
These limits are set by the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, two government-sponsored enterprises that buy and insure home loans. Loans above the conforming loan limit cannot be bought by Fannie Mae or Freddie Mac, meaning that many lenders will not offer them.
Jumbo loans are called non-conforming conventional loans. They are conventional loans because they are not government-backed loans like an FHA loan, but they do not conform to the limits set by the FHFA.
Every year, the conforming loan limits are adjusted for every US county based on the typical market prices in the area. For most counties in America, this limit is $766,550. However, this doesn’t hold true in California, where the average home is more expensive than the conforming loan limit.
Similarly, what constitutes a jumbo loan varies widely by the California county you’re looking at. In Alpine County, a $776,000 home would need a jumbo loan, but in Alameda County, this same loan would be a conforming loan because of the different loan limits.
Wherever you are in California, though, any mortgage above $1,149,825 will be a jumbo loan, as this is the highest limit in the state.
Benefits of Jumbo Loans
A bigger loan enables you to stay competitive in a state where home prices can routinely be thousands of dollars above the typical mortgage limits. Their benefits include:
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Afford More Home
More money to spend means that you can expand your home search and purchase the perfect property for your needs.
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Buy in More Desirable Areas
If your dream has always been to live in a painted lady in San Francisco, you can make that dream come true with a jumbo loan.
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Avoid Opening Multiple Mortgages
Without jumbo loans, those wanting to purchase million-dollar homes would need to pursue bundled mortgage loans, which would all have their own interest rates and payment schedules. With this option, you’ll have only one mortgage with only one rate.
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Buy a Multifamily Property
A jumbo loan is a great option if you’d like to buy a duplex or triplex in a desirable area, and then rent out the other units for extra income. These are often pricier than a single-family residence, and a larger home loan will give you a competitive edge.
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No Mortgage Insurance
When you work with F5 Mortgage for your jumbo loan, you don’t need to pay for insurance, even if you provide a down payment smaller than 20%.
Jumbo Loan Limit in California
Jumbo loan limits are actually the upper threshold of the conforming limit, so anything above that threshold is considered a jumbo loan. Jumbo lenders are then allowed to make their own cut-offs for how much they will lend beyond that baseline.
It’s possible to get a home loan far above that limit depending on your credit score, debt-to-income ratio, and down payment, though most lenders have a cut-off of $3 million.
For most California counties, the current jumbo loan limits are the same as it is elsewhere in the United States — $766,550. However, in some areas, they are as high as $1,149,825, so it’s crucial to narrow down your home hunt to a particular county before you start reviewing your loan options.
County Variations in California Jumbo Loan Limits
Every county has its own jumbo loan limit based on market prices. None fall below the $766,550, but many are well above.
These counties are the most expensive, with loan limits of $1,149,825:
- Alameda County
- Contra Costa County
- Los Angeles County
- Marin County
- Orange County
- San Benito County
- San Francisco County
- San Mateo County
- Santa Clara County
- Santa Cruz County
The next highest limit is Napa County, with a loan limit of $1,017,750.
Basic Requirements for a Jumbo Loan in California
Because jumbo loans cannot be insured by Fannie Mae or Freddie Mac, they are riskier for the lender. As such, jumbo loans typically require a more robust financial situation than conventional loans.
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Down Payment
The down payment is what you pay at close to secure your mortgage. While you may be able to pay as little as 3% for a conventional loan, the minimum down payment for a jumbo loan will be much higher.
Usually, lenders expect 10%, though they may want more based on the type of property you are buying. An investment property may need a down payment of up to 20%, while one used as a primary residence may not need that much.
The more you provide as down payment, the better mortgage rates you can access and the lower your mortgage payments will be, so strive to provide as much as possible. You will also need cash reserves, sometimes up to a year of mortgage payments. Learn more about California down payment assistance programs.
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Credit Score
As these loans are riskier, a higher credit score is a must-have. The minimum credit score you can have for a jumbo loan is 680, but many lenders in California are looking for credit scores of 720 or higher, given the high prices of property.
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DTI Ratio
To qualify for a jumbo loan, you need a great debt-to-income ratio, meaning that your gross monthly income is high and your debts are low. Typically, your DTI cannot be more than 45%, and many California lenders will expect something closer to 40-43% before they will approve you.
Navigating California Jumbo Loans With Lenders
Getting a jumbo loan is both exciting and nerve-wracking, so it’s important that you familiarize yourself with the process before you get in touch with a mortgage lender.
Pre-Approval Process for Jumbo Loans
Getting pre-approved gives you a leg up when purchasing a property, and it is especially important for a jumbo loan in competitive markets like California. With this in hand, you’ll be ready to come to the negotiating table right away, sure you’ll have easy approval once you’re ready to close on a house.
F5 Mortgage’s pre-approval process preparation provides a list of all the documentation we will check, which includes proof of income, identification, and proof of insurance. You can then apply for pre-approval online and get a response within a few days.
Required Documents
To qualify for a jumbo loan, you’ll need the following information:
Identification
We will need a government-issued ID, such as a driver’s license, state ID, or passport.
Tax returns
Self-employed borrowers will need two years of personal and business returns, such as K1s, 1099W, or W2. Salaried borrowers need last year’s tax returns and two pay stubs.
Assets
Be prepared to show 60 days of bank statements for checking and savings accounts, as well as any investments you own, like a 401k. You’ll need two months of statements for the account you intend to use for your down payment. If you will be using gift funds, please let us know ahead of time, and we will provide you with a gift letter for the donor to fill out.
Proof of insurance
Regardless of whether the previous owners had a policy or this is a new construction, you will need to show that you have purchased homeowners insurance.
Appraisal
Any time you open a mortgage, lenders will require a home appraisal, but in the case of jumbo loans, you may need two. Your lender wants to ensure that the home is truly worth the purchase price and that it’s not likely to suddenly depreciate in the near future.
Closing Costs
Because jumbo loans are more complicated, requiring additional checks, the origination process is also more expensive. While conforming conventional loans have closing costs between 3% and 6%, a jumbo mortgage may have slightly higher costs. Speak with your lender ahead of time to get a better idea of how much you should expect to pay.
Interest Rates and Monthly Payments for California Jumbo Loans
Jumbo loan rates are often higher than conforming loan rates because they are riskier for the lender, and they can’t be sold to Fannie Mae or Freddie Mac should the borrower default. However, they are often comparable to rates for smaller loans, though they can vary widely based on the market. Exploring today’s interest rates will show that they are about half a percentage point higher than a conforming loan.
This is why you should use a jumbo mortgage calculator and identify how jumbo loan interest rates will impact how much you can afford.
Jumbo Loans vs. Conforming Loans
Both conforming loans and jumbo loans are offered by private lenders and are not backed by the government like an FHA loan. As such, they are both conventional loan products.
The difference lies in whether or not they can be bought and packaged by government-sponsored entities. Loans that are below the conforming loan limits set by the Federal Housing Finance Agency can be purchased by one of these two entities and bundled with other loan products, then sold as mortgage-backed securities (MBS) to investors in the secondary mortgage market.
By bundling and packaging mortgages, mortgage-backed securities provide liquidity to the market and allow lenders to originate more loans, enabling more individuals to access funding. This market is a key element of the mortgage industry, and conforming loans are its bread and butter.
However, a jumbo loan is considered too risky for the secondary mortgage market, so it cannot be packaged and sold as a mortgage-backed security. This means that a jumbo lender absorbs all the risk of these loans, and hence they place more stringent requirements on qualification, as they don’t want to risk default.
In short, the conforming loan limit is the dividing line between a conforming loan — one that can be sold on the secondary market — and a jumbo loan, which cannot. This price tag determines the availability of loans, as well as the requirements a lender is likely to impose on a borrower.
Key Takeaways on California Jumbo Loans
In an expensive market like California, many hopeful homeowners find that they need a jumbo loan to afford their dreams. These loans go above the limits set by the FHFA, enabling access to more funds, and can be a game-changer in very pricey areas.
The threshold between a conforming and non-conforming loan varies by county, with some areas having limits as high as $1,149,825. Those wanting to borrow beyond these limits will need to have an excellent financial profile, including a high credit score, plenty of cash reserves, and a low debt burden.
If you’re ready to buy the home of your wildest fantasies with a jumbo loan, contact an experienced California loan advisor at F5 Mortgage. We are an experienced broker providing a variety of products, including jumbo loans, and we also assist with refinancing. Get pre-approved in just a few hours, or use our helpful mortgage calculators to learn how much you can afford.
We look forward to helping you begin California dreaming in a beautiful new home.
California Jumbo Loan FAQs
What is a 30-year jumbo mortgage?
A 30-year jumbo mortgage has a loan term of 30 years, and it can either be a fixed-rate mortgage or an adjustable-rate one. With this option, you’ll be making principal and interest payments on a fixed schedule for three decades, though some lenders will allow you to prepay.
Who might jumbo loans be best for?
A jumbo loan can be a good option for a high-income family, if it doesn’t exceed at least two to two-and-a-half times their gross household income. Also, you need a high credit score, a lower DTI, the ability to provide a large down payment, as well as cash in reserve in case you run into financial difficulties.
Can I refinance a jumbo loan in California?
Yes, you can refinance a jumbo loan in California, but you will have to meet higher standards. For example, you cannot have declared bankruptcy in the last seven years, you will need to have between six months and one year of payments in reserve, and you must meet the specific FICO score and DTI requirements of your loan originator.
The process may also take a bit longer than for a conforming loan because there is typically a manual underwriting process. As with the original loan, you’ll have to pay origination fees.
Can I use a jumbo loan for an investment property or second home in California?
Yes! Many people find jumbo loans an invaluable resource when trying to purchase an investment property or vacation home, especially in high-class areas like Malibu. However, your loan company may ask for a larger down payment or have higher requirements when you purchase investment property, as these are seen as higher risk than primary residence loans.
If you’d like to see whether you can qualify for a jumbo loan for an investment property, our advisors would be happy to discuss your options and explore what types of products would be right for your particular needs.
Why are jumbo loan limits necessary?
Jumbo loan limits help to regulate the market by determining what level of risk is safe for the secondary mortgage market. Products below the conforming loan limit are safer for investors because they have a lower risk of default, and so they are more plentiful.
As jumbo loans carry higher risk due to the lack of insurance, they are given out more selectively, which prevents defaults that may destabilize the market.
