What is a jumbo loan?
You may need a jumbo loan when you’re buying an expensive property, but you’ll have to meet stricter requirements than you would for a conforming loan.
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Patrick is a personal finance writer with a focus on real estate and real estate investing. After doing a cash-out refinance on his first house (which was bought as a foreclosure from a local bank), he was able to lower his monthly mortgage payments, pay off graduate school, and buy a new roof. Afterwards, he was hooked on real estate.
Updated July 31, 2024, 4:52 PM EDT
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A jumbo loan is a type of home loan for buyers financing the purchase of a home with a high purchase price. The Federal Housing Finance Agency (FHFA) establishes conforming loan limits for each county across the United States — $766,550 in most counties. If the house you want to buy is above that limit, you might need to apply for a jumbo loan unless you have other financing options.
Learn why there are thresholds for conforming loans, the rates and eligibility requirements you can expect with a jumbo loan, and the pros and cons of jumbo loans.
What is a jumbo loan?
A jumbo loan is a type of mortgage that allows buyers to buy high-value real estate beyond what they could with a conforming loan.
Conforming loans have thresholds because mortgage lenders often sell loans to the secondary market via government-sponsored enterprises Fannie Mae and Freddie Mac. The lender that originates your conforming loan can sell it to Fannie Mae or Freddie Mac for a variety of reasons, such as to help stabilize housing market rates or gain liquidity to meet other demands.
However, for a lender to sell a mortgage to another company through the public sector, both the home and the mortgage must meet eligibility requirements. In particular, conforming loans can’t exceed $766,550 in most counties and $1,149,825 in high-cost areas. The lender won’t be able to sell the mortgage on the secondary housing market if the loan exceeds those standards. In cases where you need to borrow more than the conforming loan limit, you’ll need to apply for a jumbo loan.
Note:
Because jumbo loans are not eligible for purchase by Fannie Mae or Freddie Mac, they represent a higher risk to the lender. That risk translates to more stringent eligibility requirements that borrowers and homes must meet to qualify.
How do jumbo loans work?
Qualified borrowers can use jumbo mortgages to purchase expensive properties. While jumbo loans are unique when compared to other types of mortgages, they function in a similar way. You’ll make a down payment and pay closing costs, then make monthly payments until your loan is fully matured or you choose to sell.
As with conforming loans, you can choose between loan term lengths to adjust your monthly payment and affect how much you’ll pay in interest over the life of the loan.
Here’s an example of what the monthly payments would be for a $1,500,000 loan with different terms and interest rates:
When do you need a jumbo loan?
Jumbo loans are necessary when the amount borrowed exceeds the limits established by the Federal Housing Finance Agency (FHFA) for a conforming loan.
The price point needed for jumbo loans varies depending on the county you live in. You can look up your state and county on the FHFA’s website. Most counties have a maximum conforming loan limit of $766,550, but there are exceptions in more expensive areas.
Regardless of what loan type you are shopping for, you should only do so when you’re financially prepared and when market conditions in your area match your needs.
What are the limits for jumbo loans?
If you are looking to buy a home and the mortgage exceeds conforming loan limits you will likely need a jumbo loan.
The maximum borrowing amount for a jumbo loan depends on your lender. Because the loan is unlikely to be sold through the public secondary housing market, it’s similar to a portfolio loan in that the lender may choose to keep the loan on its own books. This means that many of the risks involved with jumbo loans are solely assumed by the lender that originates the loan. It also means that the maximum loan amount and loan-to-value ratio for each qualified borrower is up to the lender’s sole discretion.
What are the rates and requirements for jumbo loans?
To qualify for a mortgage using a jumbo loan, you need a strong credit score, a high income, and low debt-to-income ratio (DTI). The lender may also require you to have a large amount of cash savings set aside should your financial situation suddenly change.
While each lender sets its own requirements, here are the typical criteria you’ll need to meet:
- Credit score of 700
- DTI no more than 43%
- Down payment of 20%
You might also need to submit documentation to prove your income, assets, and cash reserves. Some lenders might require you to have enough money to cover mortgage payments for up to a year.
The rates for a jumbo loan vary with each lender and qualified borrower. While jumbo loans have historically had higher rates than conventional mortgages, that gap has narrowed in recent years.
Keep in mind:
Lenders might have different requirements based on their risk tolerance, so make sure you shop around. You might be able to get a jumbo loan with a down payment as low as 5%, but the tradeoff could be a higher interest rate.
What are the pros and cons of jumbo loans?
Jumbo loans are useful if you’re buying an expensive home, but there are additional factors to consider. Here are a few pros and cons of jumbo loans:
Pros
- Enable qualified borrowers to borrow more money
- Can be used to purchase investment or multi-family properties
- May allow borrowers to negotiate the terms and conditions of the loan more easily since it doesn’t conform to outside standards
Cons
- Have eligibility requirements can be difficult to meet — may require lower loan-to-value ratio/ or higher down payment, a higher credit score, lower debt-to-income ratio, or higher income and net worth
- Often have higher interest rates and closing costs than conforming loans
What is a jumbo loan FAQ
How do jumbo loan rates compare to conforming loan rates?
Jumbo loan rates are typically higher than conforming loan rates because the loan is riskier for the lender. Lenders compensate for the risk of a sizable loan by charging more in interest. While rates tend to be a little higher, jumbo loans often reflect the mortgage rate trends that you’ll see for 30-year conventional loans.
Can you refinance a jumbo loan?
Yes, jumbo loans can be refinanced like other types of mortgages. Should rates drop or your financial situation improves, you can refinance a jumbo loan just like any other type of mortgage. You’ll likely still have to meet higher standards for credit score, DTI, and savings than you would for a conforming loan.
What credit score do you need for a jumbo loan?
It depends on the lender, but expect higher requirements than you would need for a conventional loan. You’ll typically need a credit score of 700 or better to qualify. Review your credit report before you begin shopping for a jumbo loan to make sure your score is high enough. You can request copies of your report from the major credit bureaus — Equifax, TransUnion, and Experian — or you can get a free report from AnnualCreditReport.com.
Are jumbo loans harder to qualify for?
Yes, jumbo loans are harder to qualify for because you are borrowing a larger amount of money and the loan is a riskier investment for the lender. Financial institutions want to be sure that the borrower won’t default on the loan. For this reason, they’ll closely examine how you’ve handled debt in the past, how much money you have on hand, and what your income/debt situation is.
How much can you borrow with a jumbo loan?
The amount you can borrow with a jumbo loan depends on the lender and your personal finances. You’ll need a strong credit score, low debt-to-income ratio, and a high amount of cash reserves. Because jumbo loans are not sold to Fannie Mae and Freddie Mac, lenders assume the risk. Therefore, the amount you can borrow will vary with each lender’s level of risk tolerance.