Big dreams sometimes have big price tags. When you’re looking for a home with more space or one in a more expensive market, you may need a jumbo loan to buy it.
What is a jumbo loan? Jumbo loans exceed limits set by the federal government for lenders to sell mortgages to Freddie Mac or Fannie Mae. While jumbo loans let you borrow more than the conforming limits for conventional loans, the lender is taking on more of the risk and may set stricter borrower requirements.
Here’s what you need to know about jumbo loans:
- How Do Jumbo Loans Work?
- Qualifying For a Jumbo Loan
- What’s the Difference Between Jumbo and Conforming Loans?
- How Much Do Jumbo Loans Cost?
- Pros and Cons of Jumbo Loans
- Who Offers Jumbo Loans?
- Who Should Get a Jumbo Loan?
- Jumbo Loan FAQ
- The Bottom Line on Jumbo Loans
How Do Jumbo Loans Work?
Jumbo loans work much like conforming conventional mortgages in that they are offered by private lenders. Where they differ is lenders may not sell jumbo loans to government-sponsored enterprises Fannie Mae and Freddie Mac. That means the terms and conditions of the loan are up to the lender.
What qualifies a loan as jumbo?
When mortgage lenders issue loans that conform to the limits set by the Federal Housing Finance Agency, they can sell those loans to Fannie Mae or Freddie Mac. That takes those loans off the lenders’ books, and they can use the money from selling the loans to make more loans.
Mortgages that exceed the conforming limits are called jumbo loans, or nonconforming loans. Because they cannot be sold to Fannie or Freddie, the lender takes on all the risk. Lenders often will compensate for that greater risk with stricter requirements for borrowers to meet.
How much is a jumbo loan?
So, what amount is a jumbo loan? The answer depends on where the home is located.
The FHFA publishes a list of the maximum loan limits in each county. Loans exceeding these limits are jumbo loans. What qualifies as a jumbo loan changes from year to year, with the limits based on the FHFA’s annual report on house price indexes.
The 2023 conforming loan limit for single-family homes in most parts of the United States is $726,200. The limit is $1,089,300 in high-cost counties, as well as in Alaska, Hawaii, Guam, and the U.S. Virgin Islands.
High-cost areas are those where 115% of the local median home value exceeds the conforming limit. For 2023, that means places where the median home price is $631,478 or more are high-cost areas. This map shows all the high-cost counties in the United States.
While most jumbo loans are for amounts over the conforming limit and usually up to $2 million, there’s no real maximum. How much you can borrow ultimately depends on the lender.
Jumbo loan requirements for the property
Each lender will have its own requirements about the types of homes you can buy with a jumbo loan. Typically, properties bought with jumbo loans are in reasonable condition and tend to be larger or located in prime areas, such as in or near major cities, or in high-quality school districts.
Qualifying For a Jumbo Loan
To get a jumbo loan, borrowers need to prove they can repay it. Given the large amounts involved and the risk to the lender, that often means borrowers have to meet stricter requirements compared to conforming loans.
Here’s generally how to qualify for a jumbo loan.
Because jumbo loans are more risky for lenders, they usually require a significant down payment.
“The down payment requirement differs from lender to lender, but generally you have to have more skin in the game,” says Tabitha Mazzara, director of operations at Mortgage Bank of California in Manhattan Beach, California. “Usually, the minimum is going to be around 10%.”
Keep in mind however, that the minimum depends on the lender. Some can be risk averse and ask for a significantly higher down payment. Since many lenders don’t require private mortgage insurance on jumbo loans, don’t be surprised if you need to put down 20% — or even 25% — to qualify.
There’s no minimum requirement, but you’ll typically need a credit score of at least 680 — if not an even higher score — to be considered for jumbo loan. Again, keep in mind that every lender is different, and most will want an even higher credit score, especially if you don’t have a large down payment or proof of a strong income source.
“If you intend for a $1 million-plus jumbo loan, then having a credit score of more than 720 is a must,” says Dino DiNenna, a real estate broker at Southern Lifestyle Properties and a certified residential specialist in Hilton Head Island, South Carolina. “If you intend for an even bigger loan, lenders may look for a 740 score or more.”
Your debt-to-income ratio measures how much of what you earn goes toward paying debt. Lenders rely on this figure when evaluating all borrowers, but it’s especially important with jumbo loans because the payments likely will be higher and take up a larger portion of your earnings.
Each lender has its own limits, but it’s common for lenders to require a DTI ratio of less than 45%. You can use our DTI ratio calculator to help estimate yours.
Income and asset documentation
When applying for a jumbo loan, you usually will be asked to provide plenty of documents such as recent tax returns, pay stubs, and bank statements. If you are self-employed or own a business, you also can expect to be asked for profit and loss statements and balance sheets.
To be sure you can afford to repay the loan, lenders may request more financial documentation for a jumbo loan than typically is required for a conforming loan. Some lenders also may require borrowers to have saved up to a year’s worth of cash reserves.
What’s the Difference Between Jumbo and Conforming Loans?
The primary difference between a jumbo loan and a conforming loan is that a jumbo mortgage exceeds the FHFA limits for loans that can be sold to Fannie Mae and Freddie Mac.
Because Fannie and Freddie cannot buy jumbo loans, they carry greater risk for mortgage lenders. To compensate, jumbo loans may come with higher interest rates and require a larger down payment, and often have a more stringent underwriting process.
Conforming Loans vs. Jumbo Loans
|Conforming Loans||Jumbo Loans|
|Loan Limits||For 2023:|
— $726,200 in most areas.
— $1,089,300 in designated high-cost areas.
Determined by the FHFA.
|Anything above the conforming loan limit up to $2 million, though maximum jumbo loan amounts are determined by individual lenders.|
|Down Payment||Minimum of 3% down, or 20% down to avoid paying private mortgage insurance.||Varies by lender, but usually a minimum of 10%.|
|Credit Score||Minimum of 620.||Varies by lender, but usually a minimum of 680 is required.|
How Much Do Jumbo Loans Cost?
Jumbo loans are riskier for lenders because the loans can’t be offloaded to Fannie Mae or Freddie Mac. That means borrowers can expect to pay more for a jumbo loan than a conforming loan.
While jumbo loans may have slightly higher interest rates than conforming loans, they are competitive overall for a couple of reasons:
- Jumbo loans often have higher credit score requirements, and therefore go to borrowers with good credit and who pose less of a risk to lenders. This helps keep interest rates on jumbo loans competitive.
- The higher balance on a jumbo loan means the monthly payment is a larger amount than it would be on a loan for less money with the same rate. That means a jumbo loan brings in more cash to the lender each month when it’s being paid on schedule.
Closing costs on jumbo loans often are more expensive than for conforming mortgages. The loan amount is larger, and the extra risk lenders take on may prompt them to be more thorough in reviewing your application and examining your finances. That can mean manual underwriting or the lender requiring a second appraisal. Such extra efforts cost money, and the lender will pass those costs on to you at closing.
Pros and Cons of Jumbo Loans
Jumbo loans let borrowers buy more-expensive homes, but they aren’t without drawbacks. Before applying, consider these pros and cons:
Jumbo Loan: Pros and Cons
|You can borrow more than the FHFA limit, which may be essential for buying more-expensive properties.||High closing costs.|
|Interest rates are competitive with conforming loan rates.||Stricter credit requirements.|
|Jumbo loans can be used to buy vacation homes or investment properties.||More difficult overall to be approved for.|
Who Offers Jumbo Loans?
Jumbo loans come from many of the same institutions that offer conforming loans, including major banks, online lenders, local banks, and credit unions. Check lenders’ websites to see if they offer jumbo loans.
VA jumbo loans
Veterans Affairs may not call them jumbo loans, but if you are eligible for a VA loan and have full entitlement, there’s no limit set by the government on how much you can borrow. You have full entitlement if:
- You’ve never used a VA loan benefit.
- You’ve paid a previous VA loan in full and sold the property.
- You’ve used your VA loan benefit but had a foreclosure or compromise claim and repaid the debt in full.
If you have partial entitlement, there may be a limit on how much you can borrow. In all scenarios, you’ll need to find a lender who’s willing to approve your application based on factors such as your credit score and income.
Who Should Get a Jumbo Loan?
Jumbo loans are designed for borrowers who want to buy more-expensive homes. That means they’re usually for people with high incomes and good credit. These often are older homebuyers, or homeowners who are trading up on the property ladder.
People who lack solid credit may struggle to qualify for a jumbo loan. The same is true for those without sufficient income to afford the payments on a more expensive home.
Jumbo Loan FAQ
Here are answers to some frequently asked questions about jumbo loans.
Yes, it’s possible to refinance a jumbo loan. You can apply for a refinance with most lenders that offer mortgage refinancing. If you’ve paid off enough of the loan’s balance, you might be able to refinance to a conforming loan.
You can use a jumbo loan to buy almost any type of property, including vacation homes or investment properties.
Yes, you can get a jumbo mortgage with an adjustable interest rate. Before you apply, consider the pros and cons of fixed-rate vs. adjustable-rate mortgages, in addition to the pros and cons of jumbo loans in general.
The Bottom Line on Jumbo Loans
A jumbo loan can make it possible for you to buy a home that’s on the pricier side. Before you apply for one, you should evaluate your financial situation to determine whether a jumbo loan makes sense. Not only are they more expensive, but jumbo loans also usually have stricter requirements for borrowers. If you can meet those standards, however, then a jumbo loan could make your homeownership dreams a reality.
T.J. Porter contributed to the reporting of this article.