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What Is a Jumbo Loan and When Do You Need One?

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Couple getting advice jumbo loan

If your dream home is on the pricier side, a regular mortgage may not be enough to cover the cost. That’s where jumbo loans come in.

Jumbo loans are large home loans that exceed the standard mortgage limits set by the federal government. By having no maximum limit, jumbo loans can be useful if you’re shopping for a home that’s more expensive. However, keep in mind that these loans come with certain borrower requirements.

Read through this guide to learn more about the world of jumbo loans:

What Is Considered a Jumbo Loan?

A mortgage is considered a jumbo loan when the mortgage amount is greater than the conforming loan limits laid out by the Federal Housing Finance Agency. These conforming loan limits serve as the maximum amounts that Freddie Mac and Fannie Mae can legally guarantee.

Mortgages that aren’t insured by the government pose a bigger risk to lenders —  and jumbo loans fall into this category. Because jumbo loans exceed conforming loan limits, they tend to have stricter criteria that borrowers must meet to secure this type of mortgage.

How much is a jumbo loan?

The conforming loan limits are updated annually by the FHFA. So, what amount is considered a jumbo loan? In 2021, the maximum conforming loan limit for a single-unit property is $548,250. In designated high-cost areas, the maximum loan limit for one-unit properties is $822,375.

The FHFA also establishes limits for multi-unit properties, up to four units, and provides a list of the maximum loan limits in each county. Mortgages that exceed these limits are considered jumbo loans.

When do you need a jumbo loan?

A jumbo loan can come in handy when you want to purchase a home that’s more expensive. It could be a larger property that comes with a higher price tag, or a house in a seller’s market where prices exceed the conforming loan limit due to demand. Such situations can make jumbo loans an appealing option — as long as the buyer can meet the stricter requirements put forward by the mortgage lender.

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What’s the Difference Between a Jumbo Loan and a Conforming Loan?

The primary difference between a jumbo loan and a conforming loan is that a jumbo mortgage exceeds the maximum limits on home loans accepted by Fannie Mae and Freddie Mac.

Because jumbo loans aren’t backed by Freddie Mac and Fannie Mae, they carry more risk for mortgage lenders. As a result, jumbo loans may come with higher interest rates, require a larger down payment, and face a more stringent underwriting process.

Though specific requirements will vary by lender and borrower, check out the table below for a breakdown of where jumbo loans can differ from conforming loans:

Conforming Loans vs. Jumbo Loans

CategoryConforming LoansJumbo Loans
Loan LimitsFor 2021:
– $548,250 in most areas
– $822,375 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 PaymentMinimum of 3% down, or 20% down to avoid paying private mortgage insuranceMinimum of 10% down, though it varies from lender to lender
Credit ScoreMinimum of 620Minimum of 680, though requirements can vary by lender
Interest Rate– Average of 2.86% for 30-year, fixed-rate mortgages as of Sept. 16
– Average of 2.12% for 15-year, fixed-rate mortgages as of Sept. 16
Average of 3.03% for 30-year, fixed-rate jumbo loans as of Sept. 20

Which Is Better? 15-Year Mortgages vs. 30-Year Mortgages

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Qualifying For a Jumbo Loan

To take out a jumbo loan, borrowers need to prove they can pay off their mortgage, which often means meeting stricter requirements compared with conforming loans. Here’s what lenders may look at when assessing whether someone would qualify for a jumbo loan.

Jumbo loan limits

There’s no official maximum limit on jumbo loans. While jumbo loans typically max out at $1 million to $2 million, how much you can borrow ultimately depends on the lender.

To qualify as a jumbo loan, your mortgage must exceed the maximum conforming loan limits on mortgages insured by Fannie Mae and Freddie Mac.

Down payment

Because jumbo loans are viewed as higher risk, lenders usually require a larger down payment compared with conforming loans. Still, there’s no uniform policy on the down payment needed for a jumbo loan.

“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%. For us, most of our customers put about 20%. … If your customer defaults on a million-dollar loan, that’s a huge hit to the bank.” 

Whatever the down payment requirement, there are plenty of reasons to put at least 20% down. For example, making a 20% down payment allows you to skip paying private mortgage insurance, which is usually required until you’ve reached 20% equity in your home.

Credit score

Requirements vary by mortgage lender. There’s no credit score minimum to qualify for a jumbo loan, though having a score of 680 or higher is a rule of thumb. In general, the credit score needed to get approved for a jumbo loan is higher compared with conforming loans.

“If you intend for a $1 million-plus jumbo loan, then having a score of more than 720 credit 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.”

Income and asset documentation

When you’re applying for a jumbo loan, you’ll typically be asked to provide W-2s, tax returns, pay stubs, bank statements, profit and loss statements and balance sheets for applicants who are self-employed or own businesses, and proof of additional income. Lenders may request more financial documentation than typically required for a conforming loan.

Those pieces of documentation help lenders evaluate these areas of your financial profile:

  • Debt-to-income ratio: This ratio compares how much money you owe versus how much money you earn, and shows lenders whether you can handle taking on more debt. “Lenders want to see a lower DTI for jumbos,” DiNenna says. “They intend to stick to less than 43% DTI to approve you for a jumbo loan.”
  • Cash reserves: Lenders want proof that you have enough money in savings to cover monthly payments for a certain length of time. Some lenders may require up to a year’s worth of cash reserves.

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The Bottom Line on Jumbo Loans

A jumbo loan can be a useful option if you want to purchase a home that’s on the pricier side or live in a costly area. 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 may be right up your alley.

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