A jumbo loan is a type of mortgage used by homebuyers who want to finance a property that exceeds the standard conforming loan limit set by the Federal Housing Finance Agency. In other words, it’s a way to borrow more money than what’s typically allowed for a conventional loan. Jumbo loans come with flexible terms, but also require stricter qualifications for the borrower.
Here’s what you need to know about jumbo loans:
- What is a jumbo loan?
- Difference between jumbo loans vs. conforming loans
- Jumbo loan requirements and qualifications
- Qualifying for a jumbo loan
- Why are jumbo mortgages treated differently?
What is a jumbo loan?
A jumbo loan is a type of mortgage that exceeds conforming loan limits. The conforming loan limit represents the maximum loan size for mortgages to be purchased by Fannie Mae and Freddie Mac. These two government-sponsored entities set underwriting guidelines for conforming loans, such as conventional loans and FHA loans, and purchase these loans from mortgage lenders. This provides lenders with funds to issue more loans to consumers.
The conforming loan limit is determined primarily by your location. In 2023, the conforming loan limit for most areas of the U.S. is $726,200 for one-unit properties. In areas that are considered to have a high cost of living, that limit jumps to $1,089,300. When you purchase a higher-priced home and want to borrow more than your area’s conforming loan limit, you must apply for a jumbo loan, which comes with different terms and qualification requirements.
| When does a jumbo loan make sense? Jumbo loans could make sense when you’re purchasing a home in a high-cost area or when you’re ready to upgrade to a more expensive home, whether it’s your primary residence, a vacation home, or an investment property. |
Benefits and considerations of jumbo loans
Here are some benefits to consider before pursuing a jumbo loan, as well as what to expect when applying for a jumbo loan.
Finance a more expensive home
Jumbo loan amounts are higher than conforming loans. The limit depends on where you live, so if you’re ready to boost your homebuying budget, then a jumbo loan could be the right choice. And in areas with a high cost of living, it could be difficult to even find a home that fits the conforming limits.
In San Francisco, for instance, the median sold home price was $1.3 million in November 2022, according to Realtor.com. With the average home exceeding the conforming loan limit, many homebuyers in the area need to consider either a jumbo loan or a larger down payment to purchase a home.
Access flexible interest rates
Even though you’re borrowing more money, jumbo loan rates are still competitive compared to conforming loans. In fact, some borrowers can even qualify for lower rates since jumbo loans typically come with stricter lending standards.
As of December 2022, the average 30-year fixed jumbo loan rate was 6.39%, while the average 30-year fixed rate conforming mortgage was 6.33%. That’s only a 0.06% difference between these two options.
Additionally, jumbo loans aren’t limited to fixed rates or 30-year terms. Lenders have flexibility since they don’t have to meet conforming loan standards. So you can negotiate both term length and adjustable rates to meet your preferences, then refinance your jumbo loan into a fixed rate later on.
No mortgage insurance requirements
When you take out a conforming loan with a down payment of less than 20%, you typically must pay mortgage insurance. This extra fee mitigates the lender’s financial risk in the event you default on the home loan.
However, some jumbo loans don’t require mortgage insurance because the underwriting process is far more stringent. You may either have to make a larger down payment or have significant cash reserves on hand. This gives the lender confidence in your ability to repay the loan.
Stricter qualification requirements
Not all lenders offer jumbo mortgages, so research multiple options before choosing one. Larger banks, such as Wells Fargo, are more likely to have jumbo loans. To qualify, you’ll need excellent credit, a high level of income with comparatively low debt, and a large supply of cash reserves.
Banks often require that you have as much as 12 months of mortgage payments in liquid accounts to qualify for a jumbo loan. While you’re able to take advantage of flexible loan terms, lenders want to see the financial security to support such a large loan.
Difference between jumbo loans vs. conforming loans
| Type of loan | Down payment range | Average interest rate (30-year mortgage)* | Closing costs | Fees |
|---|---|---|---|---|
| Jumbo loan | 10% to 30% | 6.39% | 2% to 5% | Contact lender |
| Conforming loan | 3% to 20% | 6.33% | 2% to 5% | 1% to 2% |
Even while many of the percentages are the same between a jumbo and conforming home loan, the amounts will vary significantly since the purchase prices are so different.
For instance, a 10% down payment on a $1.5 million home would be $150,000, while the same down payment on a $400,000 home would be just $40,000. A $1.35 million mortgage with 4% in closing costs would add another $54,000 in cash needed to close. The $360,000 mortgage with 4% to close would cost just $14,400.
Jumbo loan requirements and qualifications
Jumbo loans can come with favorable terms, but the requirements to get approved are much stricter than a conventional mortgage with a lower loan amount.
First, you’ll need to meet tougher credit requirements. An FHA loan only requires a 580 to qualify for the 3.5% down payment, while jumbo mortgage lenders typically have a minimum of 680 or 700.
Down payment amounts also vary by lender, but usually only go as low as 10%. Some lenders may require borrowers to put down as much as 30% of the purchase price. Much of this depends on your debt-to-income ratio, or DTI.
Expect a maximum DTI of 43%, meaning your monthly debt payments (including the jumbo mortgage) cannot exceed 43% of your monthly gross income.
Qualifying for a jumbo loan
Here’s what to expect during the approval process for a jumbo loan:
- Credit score: You’ll need strong credit, usually at least a 700 credit score.
- Debt-to-income ratio: Your total monthly debts should not exceed 43% of your gross (pre-tax) income. An exception may be made if you have significant cash reserves.
- Documents needed: Expect to provide tax returns, pay stubs, bank statements, profit and loss statements for business owners, and proof of income for other sources of cash flow, like commission or investments.
- Prequalification: Getting prequalified with a lender allows you to house hunt confidently and offer a prequalification letter to the seller. During the prequalification process, you’ll talk about your finances and get a sense of your budget.
- Cash reserves: In addition to having enough cash on hand for a down payment and closing costs, you’ll also need to show that you have enough money to cover between six and 12 months of mortgage payments. This is in case you experience a financial emergency like losing your job.
- Appraisals: Many jumbo lenders require two appraisals to feel secure in the loan amount they approve.
Why are jumbo mortgages treated differently?
Jumbo mortgages differ significantly from conforming loans because the loan amounts are so much higher. Lenders are not using standard approval criteria that allows the loan to be sold to Fannie Mae or Freddie Mac after closing.
Consequently, lenders usually keep the loan on their own books. So it’s important they feel confident the jumbo borrower will be able to keep up with payments and have enough cash on hand to cover any blips in their income. Â