The Impact of Credit Scores on Jumbo Mortgage Rates: What You Need to Know

  • Lending
  • 06.01.2025 08:35 am

It seems like rising prices have been the topic of housing conversations for the past few years. Many families face a higher tab for everyday purchases at the grocery store and local restaurant, and for larger expenses like buying a home. A recent report from the National Association of REALTORS® (NAR) showed that home prices continued to rise in 85% of U.S. cities in the fourth quarter of 2023.

As prices climb, you might need to borrow more to buy a home, which could mean securing a jumbo mortgage instead of a smaller, conforming loan.

To qualify for the best jumbo mortgage rate, you’ll need to understand what makes up your credit score, how to improve it, and the other factors that can influence how much you’ll pay for a loan.

Demystifying jumbo mortgages

The Federal Housing Finance Agency (FHFA) sets the conforming loan limit (CLL) each year. In 2024, the limit for most of the U.S. is $766,550, with higher limits for high-cost-of-living areas like Alaska, Hawaii, and the British Virgin Islands. Loans above this limit are classified as jumbo.

Mortgages within the CLL are purchased by Fannie Mae and Freddie Mac, government agencies that provide liquidity to lenders by buying and repackaging mortgages for the secondary market. Since jumbo mortgages can’t be purchased, they’re typically held by the issuing lender, who faces a significant risk if a borrower defaults. Because of this risk, jumbo mortgage lenders look for highly qualified borrowers.

Lenders generally look for borrowers with:

  • Very good or excellent credit scores

  • Low debt-to-income (DTI) ratios

  • Access to substantial cash savings

  • Proof of stable income and assets

These qualified borrowers may access up to a few million dollars to buy a luxury home, investment property, or vacation home.

The importance of credit scores in mortgage lending

If you’re in the market for a jumbo loan, understand that your credit score is a significant factor. And higher credit scores often make you eligible for more favorable loan terms and interest rates.

The industry standard for credit scoring, used by 90% of lenders, is the FICO score. Your FICO credit score is a numeric value between 300 and 850, comprising five elements of varying weight.

  1. Payment History (35%): The most important element in your score is whether your credit report reflects a history of timely payments on past debt. Missed payments can affect your score negatively, while on-time payments typically help your score.

  2. Credit Utilization (30%): Utilization is calculated as the amount of credit you use vs. your overall available credit. A lower ratio typically signifies good borrowing habits and the ability to manage debt, often resulting in a more favorable score.

  3. Length of Credit History (15%): Credit lines that have been open for years show your ability to manage credit over the long term. Lenders will consider the average age of your credit accounts, including the age of your oldest and newest accounts.

  4. Credit Mix (10%): Your credit mix is based on whether your report has different types of credit, including installment (mortgages, student loans, car loans) and revolving debt (credit cards, lines of credit).

  5. New Credit (10%): The new credit section considers how many accounts you’ve opened and the number of inquiries on your credit report in the past 12 months. Applying for a lot of credit all at once may signify risk to lenders.

Your score will fall into a classification ranging from poor to exceptional.

<580

Poor

580-669

Fair

670-739

Good

740-799

Very Good

800+

Exceptional

Lenders who issue jumbo mortgages typically only consider borrowers in the Good, Very Good, and Exceptional categories, with most having a credit score of 700 or better.

Factors that influence jumbo mortgage rates

In addition to your credit score, lenders review several other personal factors to determine your rate.

  • Debt-to-income (DTI) ratio: Lenders typically want to see a DTI ratio of 40% or below, and that includes what you’ll eventually pay for your mortgage. If you have debt exceeding 50% of your income, you may have a harder time securing a loan.

  • Cash reserves: Lenders look for borrowers who can prove they have several months of mortgage payments nestled safely away in cash reserves. Since the lender assumes more risk by holding the loan themselves, they’ll seek to validate that you can cover mortgage payments, even if something happens to your income.

  • Loan type and term: Borrowers typically choose between a 15- or 30-year loan term, with shorter terms typically having lower interest rates. It’s less risky for a lender to recoup their money in 15 years as opposed to 30. Keep in mind shorter loan terms will mean higher monthly payments, so it’s important that you can commit to paying the higher amount for the entire term.

  • Down payment: While your credit score and other factors certainly play a part in determining your mortgage rate, your lender may also be willing to offer a lower rate in exchange for a larger down payment. Some lenders may require down payments of up to 25-30%. If you can do slightly more, the lender may be willing to extend a lower interest rate since the overall loan amount is smaller and, therefore, less risky.

Understanding jumbo mortgage rates

Beyond personal factors like your qualifications and the type of loan you choose, economic conditions can also affect how much interest you’ll pay on a jumbo mortgage.

  • Federal interest rates: Mortgage rates, while not directly tied, are influenced by changes to the federal funds rate. When the Federal Reserve hikes rates, it will be reflected in higher jumbo mortgage rates, regardless of your financial standing. Keep in mind that each lender chooses how they react to the Fed’s changes, so shopping around may help you secure the best rate.

  • Broader macroeconomic climate: The state of the economy as it pertains to economic growth and health can also impact what you’ll pay for a jumbo mortgage. If the housing market is booming and borrowers are flooding the market, lenders may increase mortgage rates since buyers are willing to pay more. On the other hand, an economy that’s slowing down with fewer borrowers could mean lenders need to bring down rates to attract more investment.

The impact of jumbo mortgage rates on affordability

Because of the size of jumbo mortgages, even a minor increase or decrease in interest rate can drastically influence the amount of interest you’ll pay over time.

Say you’re shopping for a single-unit property in the continental U.S. and plan to spend $1,000,000, of which you’ll put 20% or $200,000 down and take out a mortgage for $800,000. At 6.5% on a 30-year fixed-rate mortgage, the total cost of principal plus interest after the 30-year term will be $1,820,354. Compare that to a slightly higher 7.5% interest rate, which would cost $2,013,739 or $193,385 more over the life of the loan.

In the same example above, you’d have a monthly mortgage payment of $5,057 at 6.5% vs. $5,594 at 7.5%. It’s easy to see how small changes in rate could influence the affordability of a home and even make some properties out of reach based on your estimated monthly payment. One of the best ways to secure a better rate is to ensure your credit score is the highest it can be before applying.

Strategies for improving your credit score

Taking steps to improve your credit score can impact your ability to secure a great rate for a jumbo mortgage while also setting you up for long-term financial success. Follow these best practices to improve your score.

  1. Review your credit report for errors at least once a year: It’s essential to review your credit report at least once a year to keep it free from errors. Finding and correcting an error, like an account not marked as closed or a payment incorrectly reported as late, could quickly boost your score once remediated.

  2. Ensure payments are processed on time: With payment history being the single most important factor for your credit score, the number one thing you can do to improve your score is to make loan payments on time and pay the balance due in full. Automated payments and notification systems can keep you on track with timely payments.

  3. Keep credit utilization low: Be mindful of your available credit and do your best to keep utilization below 30%. Lower utilization may result in a better credit score, and paying off large debts before applying for a jumbo mortgage loan can also help lower your DTI ratio, another key factor in getting approved.

  4. Apply only for the credit you need: Submitting many credit applications in a short time can appear risky to lenders. Be sure to only apply for the lines of credit you need and confirm you have the financial resources to pay down any money you borrow.

As you seek to improve your credit score, it’s important to understand that changes are not effective immediately. It may take months for your positive financial decisions, like paying off a large debt, to reflect in your score. So it makes sense to work to improve your score at least six months before applying for any loan, especially one with significant financial impacts like a jumbo mortgage.

Disclaimer: Article content is intended for information only. It may not reflect the publisher nor employees’ views. Consult a mortgage professional before making financial decisions. Publishers or platforms may be compensated for access to third party websites.

 

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