When you’re on the quest for your ideal next home, constructing a new house to your specifications can be a very attractive idea. If you are interested in building a home to suit your high-income lifestyle, or even looking to finance in a high cost of living (HCOL) area, you might ask your lender about jumbo construction loans.
The jumbo construction loan may be an excellent home financing option for those interested in building a brand new, high-value home. So, what is a jumbo construction loan? Read on to learn more about this product.
What Makes a Construction Loan “Jumbo”
So, what is a “jumbo” construction loan anyway, and how does it differ from ? Each year, the Federal Housing Finance Agency (FHFA) issues their “loan limits” for each individual county in the United States. These dollar amounts (typically in the high six figures) don’t represent a hard ceiling or limit on the amount of money you can ultimately borrow. Instead, according to the , FHFA loan limits represent the maximum dollar amount for home loans that Fannie Mae and Freddie Mac will buy from home lenders. Because home loans above the “loan limit” are offered by many lenders, this value is also sometimes called the “conforming loan limit” for clarity.
But what if you are looking to build in a high cost of living area, like San Francisco or Brooklyn, or you simply want to build a home worth more than the FHFA conforming loan limits? Lenders meet this need for high-balance construction loans by issuing “jumbo” construction loans to borrowers who qualify. In other words, “jumbo construction loans” are home loans above the “conforming” loan limit standards set by the FHFA.
Why Get a Jumbo Construction Loan?
There are a few reasons why consumers choose to take out jumbo construction loans. You might opt for a jumbo construction loan if your construction loan needs meet one of the following conditions:
- You want to build a home, but you want to borrow more money than the for your preferred county will allow.
- You are seeking to build in a high-cost-of-living, or HCOL, area. In counties with intense demand for real estate, a “jumbo” construction loan is a common option to finance the purchase and improvement of a residential lot. You can also take out a jumbo home construction loan to build on a lot you already own.
The Jumbo Construction Loan Process
Curious about how the jumbo construction loan process works? As with for financing the construction of a new home, the jumbo construction loan process has a couple discrete steps:
- Application and underwriting. At the start of the process, your loan officer will ask for documentation to verify your income, assets, and creditworthiness (usually by “hard pulling” your credit score or FICO score). You may also fill out a loan application. These will be submitted for approval, an approval with conditions (most common), or denial.
- Closing and the construction period. If you are fully approved for a jumbo construction loan, you will likely attend a closing on your loan, whether virtually or in person. Over the course of the construction process, your builder will “draw” on the loan in order to meet the financial needs of your build (supplies, labor, permitting fees, and so on).
- When construction is completed on your brand-new home, one of two things may happen. If your jumbo construction loan is “construction-to-permanent,” or “single close” construction loan, then the loan will convert to a more typical home loan when the construction period ends. In this case you will begin to make payments on the principal and interest as soon as you are instructed by your lender or servicer. However, your jumbo construction loan might not be set up for the simplicity of a single close. At the end of these jumbo construction loans, you will either have to pay back the entirety of the construction loan, or refinance your new home with a mortgage intended for an existing home. This is sometimes called a “2x close” home loan.
What Are the Jumbo Construction Loan Requirements?
Jumbo construction loans function much like other construction loans. Your lender typically needs to approve your builder, and their plans, before they approve your high-balance home construction loan. They will also normally want to see proof that you can cover the closing costs on your home construction loan, and so may ask for bank statements. You will be required to document your income, to show that you can pay back your jumbo construction mortgage; and you should anticipate or ask your loan officer about a “hard” credit check.
Interested in Learning More?
Whether you already own the lot you’re interested in building on, or you want to take out a jumbo construction loan to purchase land and build a home above the local county’s conforming loan limit, there are many competing sources of information for consumers that can make it challenging to find a path that suits you.
This information is intended for educational purposes only. Products and interest rates subject to change without notice. Loan products are subject to credit approval and include terms and conditions, fees and other costs. Terms and conditions may apply. Property insurance is required on all loans secured by property. VA loan products are subject to VA eligibility requirements. Adjustable Rate Mortgage (ARM) interest rates and monthly payment are subject to adjustment. Upon submission of a full application, a mortgage banker will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to your individual situation.
