You’ve found your dream home: perhaps it’s in that ideal neighborhood, has a spacious kitchen, a spa-like bathroom, and a sprawling yard with flawless landscaping. But that perfect match may also come with a hefty price tag.
When it comes time to shop for your mortgage, a lender might tell you that you need a jumbo loan. But what does that actually mean?
In this guide, we’ll answer the question, “What is a jumbo mortgage?” Additionally, we’ll walk through jumbo loan rates, how a jumbo loan works, the differences between jumbo and conforming loans and more.
What is a Jumbo Mortgage?
Also known as a jumbo loan, a jumbo mortgage is used when the loan amount exceeds conventional conforming loan limits set by the Federal Housing Finance Agency (FHFA). Jumbo loans can be used to finance a wide variety of home types including primary residences, vacation homes and investment properties.
Jumbo Loans vs. Conforming Loans
A conventional loan is a type of loan that is not backed or insured by a federal government agency (FHA, USDA and VA). There are two categories of conventional loan types: “conforming” and “non-conforming.”
A conforming loan does not go over the maximum federal limits imposed by the FHFA. They follow rules established by Fannie Mae and Freddie Mac, two government-sponsored enterprises. Fannie Mae and Freddie Mac purchase conforming mortgages to free up lender money so lenders can issue more mortgages.
The 2023 maximum conforming loan limit (CLL) is $726,200 in most counties of the U.S. Any home loan amount above that limit requires you to get a jumbo loan. In high-cost counties, the 2023 CLL is $1,089,300. These loan ceiling amounts change each year to reflect home price trends throughout the country.
On the other hand, non-conforming loans – including jumbo loans – are not bought by Fannie Mae and Freddie Mac.
Lenders usually keep jumbo mortgages, meaning they do not sell them to Fannie Mae or Freddie Mac. These types of loans are not usually guaranteed or insured, which makes them riskier, though each lender has its own standards for jumbo loans.
Jumbo Loan Rates
You may think you’ll pay a higher interest rate for a jumbo loan, but not always. Jumbo mortgage rates may actually be lower or very competitive compared to conventional market rates.
How Does a Jumbo Loan Work?
Does a jumbo loan work like a conventional loan? The answer is yes — to a point. You must meet stricter requirements for property type, down payment, credit score and debt-to-income ratio.
You can choose from a fixed-rate loan or an adjustable-rate mortgage. As the names imply, the interest rate stays the same during the entire loan term with a fixed-rate loan and changes during the loan term with an adjustable-rate mortgage.
Here are a few factors that lenders consider when you apply for a jumbo loan:
- Property types: Because there aren’t any government requirements guiding them, it doesn’t matter what type of property you buy with a jumbo loan as long as you meet the lender’s requirements. So whether you want to buy an investment property or a primary residence, you can use a jumbo loan to do so.
- Down payment: You’ll typically need to put down a higher down payment for a jumbo loan. Your lender may require you to have a 20% down payment, for example, but requirements can vary by lender. Down payment requirements are often based on home type, loan amount and credit score.
- Credit score: Your FICO credit score, which ranges from 300 to 850, is a three-digit number that shows how well you pay back debt. You generally must have a minimum credit score of 620 in order to get a conventional loan. However, your lender will likely require you to have a higher credit score for a jumbo mortgage compared to a conventional mortgage.
- Debt-to-income ratio: Your debt to income (DTI) ratio is the percentage of your debt obligations that you spend compared to your monthly gross income. You can calculate your DTI yourself by dividing any required monthly minimum payments by your monthly gross income.
Benefits of Jumbo Loans
Why should you get a jumbo loan, anyway? You might have already realized one of the major benefits: jumbo loans let you borrow more than the limits set by Fannie and Freddie. So if you’re interested in purchasing a home that requires a loan above the conventional loan limits for your area, you have an alternative option.
Jumbo loans offer a number of other advantages too, including:
- The potential for competitive interest rates
- The ability to borrow the full amount of money from one loan instead of breaking it up into two different loans
- More flexibility than conventional loans with some lenders offering more customizable mortgage solutions
Jumbo loans can also be a more comprehensive financial tool because they allow you to choose a mortgage that works best for you. They might even be a key part of your overall investment strategy, particularly if you plan to invest in real estate or want to finance rather than tie up a lot of cash in real estate.
Special Requirements for Jumbo Mortgages
By now, you probably realize that you need good credit, consistent income and a good handle on your debt in order to get a jumbo mortgage. Let’s take a look at a few more jumbo mortgage requirements below.
- Lenders may require cash reserves: Jumbo mortgage lenders may require you to have more cash in the bank to ensure you’re not in danger of defaulting on your loan. You may need to prove that you have 12 months worth of mortgage payments on hand before you can qualify for a jumbo mortgage.
- Closing costs are higher: Jumbo mortgages usually have higher closing costs than conventional mortgages because of the time it takes to assess the additional qualifications that come with a jumbo mortgage. Jumbo loans also typically require higher down payments and taxes as well.
- Consistent income: Similar to a conventional loan, you’ll need to prove that you have a consistent source of income by providing two years’ worth of W-2s, tax documents or 1099s.
- Manual underwriting: Underwriting determines how much you can borrow from a particular lender by evaluating the risk that you bring to the table when you apply for a loan. Most of the time, underwriting is done through an automated digital process. However, manual underwriting means that an actual person goes through your history, assets, employment records and more. These extra steps are done because report delinquencies are more problematic when seeking a jumbo loan.