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.
Jumbo loans are mortgages that exceed limits set by the federal government for lenders to sell their home loans 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 risk and may set stricter borrower requirements.
Here’s what you need to know about jumbo loans:
- How Does a Jumbo Loan Work?
- Who Offers Jumbo Loans?
- What’s the Difference Between Jumbo Loans vs. Conforming Loans?
- Qualifying For a Jumbo Loan
- How Much Do Jumbo Loans Cost?
- Pros and Cons of Jumbo Loans
- Who Should Get a Jumbo Loan?
- Jumbo Loan FAQ
- The Bottom Line on Jumbo Loans
How Does a Jumbo Loan Work?
Jumbo loans work much like traditional mortgages in that they are offered by private lenders, but they differ in that jumbo loans cannot be sold to the government-sponsored enterprises Fannie Mae or 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 or Freddie. That takes those loans off the lender’s books, and they can use the money from selling the loan 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 considered a jumbo loan? The answer depends on where the home is located.
The FHFA updates the conforming loan limits each year and publishes a list of the maximum loan limits in each county. Loans exceeding these limits are jumbo loans.
The conforming loan limit for single-family homes in most parts of the United States is $647,200 in 2022. The limit is $970,800 in high-cost counties, as well as in Alaska, Hawaii, Guam, and the U.S. Virgin Islands.
While most jumbo loans are for amounts between $1 million and $2 million, there’s no maximum. How much you can borrow ultimately depends on the lender.
Property requirements for a jumbo loan
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.
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 lender’s websites to see if they offer jumbo loans.
Does the VA offer jumbo loans?
The Department of 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 to 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.
What’s the Difference Between Jumbo Loans vs. 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 more 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
|Category||Conforming Loans||Jumbo Loans|
|Loan Limits||For 2022:|
— $647,200 in most areas.
— $970,800 in designated high-cost areas.
Determined by the FHFA.
|$1 million 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 10%.|
|Credit Score||Minimum of 620.||Varies by lender, but usually a minimum of 680 is required.|
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%.”
As with conventional loans, if you put down less than 20% of the purchase price, expect your lender to require you to pay for private mortgage insurance. Once your home equity passes the 20% mark, you should be able to stop paying for PMI.
There’s no minimum requirement, but you generally need a higher credit score to get a jumbo loan. A score of 680 or higher is a rule of thumb.
“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 what you earn goes toward paying debts. Lenders rely on this figure when evaluating all home loans, 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 below 45%. You can use a DTI ratio calculator to help calculate yours.
Income and asset documentation
When applying for a jumbo loan, you usually will be asked to provide 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.
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 conventional one.
While jumbo loans typically 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 borrowers with good credit pose less risk for lenders. In turn, they can keep the interest rate competitive.
- The higher balance on a jumbo loan means the borrower pays more in interest each month than on a smaller loan with the same rate. The jumbo loan brings in more cash to the lender on a consistent basis 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 more manual underwriting or the lender requiring a second appraisal. The additional effort costs money, which the lender will pass on to you at closing.
Pros and Cons of Jumbo Loans
Jumbo loans let borrowers buy 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.|
|Can be used to buy vacation homes or investment properties.||More difficult overall to be approved for.|
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.
Unlike conventional mortgages, which may have restrictions, 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.