FHA jumbo loan: definition, requirements & benefits

A Federal Housing Administration (FHA) loan generally has lower credit score and down-payment requirements than conventional loans, which might make it an appealing option for first-time homebuyers. But for those who might look to get a larger loan, while still enjoying many of the perks FHA loans offer, an FHA jumbo loan could be an option to consider.

What is an FHA jumbo loan?

An FHA jumbo loan is any FHA-backed mortgage loan that exceeds the loan limits set annually by the Federal Housing Finance Agency (FHFA). Because potential homebuyers can borrow more than conforming loan limits, FHA jumbo loans may have more requirements than regular FHA loans. Since they are guaranteed by the government, FHA loans allow for more flexible conditions than many other jumbo loans.

Also, the term "FHA jumbo loan" or Jumbo High Balance loan is not officially standardized by the FHA or lenders but is broadly used in the real estate world since loans with larger limits might have special requirements depending on the lender. If you're a first-time homebuyer and are just getting to know the basics, another thing to note is that the FHA does not issue loans itself. Mortgage lenders can be anyone approved by the FHA, and you might see many large banks offering FHA jumbo loans, including Chase.

Is an FHA jumbo loan right for you?

An FHA jumbo loan might be an attractive option if you qualify for an FHA loan but need to borrow a larger amount: for example, if you want to buy a property that significantly exceeds average home prices in the area. Borrowers may also consider this type of loan if they want to take a regular jumbo loan but don't have a sufficient amount for the down payment. If you’re looking to determine whether an FHA jumbo loan is the right choice for you, you may want to talk to a lending advisor to gain a better understanding of the available options.

FHA jumbo loan limits

Every year, the Department of Housing and Urban Development announces Federal Housing Finance Agency (FHFA) loan limits and adjusts them, if necessary, based on market conditions. An FHA jumbo loan is the difference between an FHFA loan limit and the "ceiling," the maximum amount you can borrow.

FHA jumbo loan requirements

To qualify for the FHA jumbo loan, you'd have to satisfy certain lenders' requirements, which is generally a combination of those you might expect when applying for a regular FHA loan and some common for jumbo loans For example:

• Credit score: Lenders mostly follow the same credit score requirements used for a standard FHA loan. However, certain lenders might require a higher credit score due to the larger borrowing amount. Generally, the higher your credit score, the better your chance of qualifying for a loan with a lower down payment.
• Debt-to-income ratio (DTI): Your lender will determine the exact DTI requirement. However, keep in mind that it usually correlates with the credit score, and if you have a high enough credit score, you may be able to qualify for an FHA jumbo loan with a higher DTI.
• Mortgage insurance premium (MIP): A mortgage insurance premium is another necessity when getting an FHA loan. This helps protect the lender in case the borrower defaults on the loan. MIP involves two transactions: a one-time upfront payment and an annual payment. Your monthly MIP amount will depend on your down payment, mortgage term and loan-to-value ratio
• Principal residence condition: Generally, the basic FHA loan is not designed for investment properties or vacation homes, so you might encounter a "principal residence" requirement. The FHA defines a principal residence as the home a borrower occupies for most of the year.
• Second appraisal: A regular FHA loan requires an appraisal to confirm the property's real value. However, in the case of jumbo loans, some lenders to request a second appraisal. Whether you need a second appraisal usually depends on the loan amount and the lender. For example, one might require a second appraisal for all loans over $1 million.

FHA jumbo loan pros and cons

Even if you think one might work best in your situation, there are advantages and disadvantages of FHA jumbo loans. Here are some of them:

FHA jumbo loans pros

• Higher loan limits: This type of loan allows borrowers to reap the benefits of the traditional FHA loan without being constricted to conventional loan limits.
• Lower down payment: Compared to traditional jumbo loans, those who apply for the FHA jumbo loan can possibly end up making a lower down payment. This is because lenders might have more flexible requirements since FHA jumbo loans are backed by the government.
• Possible lower interest rates: Similarly, depending on your credit score, you might be able to receive lower interest rates throughout your mortgage compared to conventional jumbo loans.

FHA jumbo loans cons

• Mandatory mortgage insurance: Following the standards of FHA loans, FHA jumbo loans require borrowers to pay upfront mortgage insurance at closing, as well as annual premiums throughout the entirety of the loan.
• Higher closing costs: FHA jumbo loans may have higher closing costs than regular FHA loans. Since the house's price is one of the factors determining the FHA closing costs, jumbo loans are known for higher closing costs for borrowers.
• Set loan limits: As you learned earlier, the FHA announces mortgage loan limits annually, the size of which depends on the county the home is in and the number of units in the building. Borrowers who decide to go with traditional jumbo loans might not face these restrictions since the maximum loan amount is determined by the lender.

In summary

Buying a home with an FHA jumbo loan could be appealing for those who qualify for an FHA loan but live in high-cost areas with expensive housing. Just like other types of loans, it has some benefits and drawbacks to be aware of, so you may want to do your research and contact a home lending advisor to find the best borrowing option for your situation.