What Is a Jumbo Loan? Rates, Loan Limits and Requirements
If you’re on the hunt for a luxury home or live in a high-cost area, it’s likely you’ll need to borrow a large amount of money when you finance a home — that’s where a jumbo mortgage loan enters the picture. But what is a jumbo loan, and how does it stack up against conventional options? A jumbo loan is defined by the fact that it exceeds conforming loan limits, but there’s much more to know before you sign on the dotted line.
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Jumbo loans: What are they?
A jumbo loan is a type of conventional loan that exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA) for Fannie Mae and Freddie Mac. In 2023, single-family mortgages with balances higher than $726,200 in most U.S. counties (and $1,089,300 in high-cost areas) will be considered jumbo.
Fannie Mae and Freddie Mac are the two government-backed entities that buy and sell mortgages from private lenders, and they aren’t allowed to purchase loans that exceed conforming loan limits. The significance of this for the borrower is simply that it makes jumbo loans riskier for lenders, and therefore more difficult to qualify for and potentially more expensive.
Things you should know
Although jumbo loans are “non-conforming” loans because they don’t follow the FHFA loan limits, some jumbo loans are still considered “qualified” mortgages. This means they follow a set of rules established by the Consumer Financial Protection Bureau (CFPB) to help consumers avoid excessively risky, predatory or unaffordable loans.
However, there are also jumbo loans that don’t follow these rules, so make sure you read the fine print and ask your loan officer whether the loan you are considering is “QM” (a qualified mortgage) if you aren’t sure. Non-QM loans aren’t always bad, but it’s best to tread carefully and make large financial decisions with as much information as possible.
Understanding jumbo loan requirements
Jumbo loan requirements tend to be more stringent than conforming loans. Here’s what you can expect:
A minimum credit score of 700 may be required for a jumbo loan, which is significantly higher than the minimum required for a conventional or government-backed loan. That said, it isn’t impossibly high, and is considered only a “good” credit score — you won’t have to reach as high as a “very good” or “exceptional” score to get a jumbo loan.
Expect to make a 20% down payment at minimum; many jumbo lenders require more. At the bottom end of jumbo loans, this would amount to a required down payment of $145,240, but rises with higher loan amounts. According to the CFPB, jumbo loans can go as high as $1 million to $2 million. In that case, a minimum down payment would end up in the range of $200,000 to $400,000.
A maximum 45% debt-to-income (DTI) ratio is common for jumbo loans. Although you may have high income, if you also carry a lot of debt, you may have trouble qualifying for a jumbo loan.
You’ll likely be required to show that you have several months or years of cash reserves on hand to safeguard against unexpected expenses or other financial speedbumps. But the exact amount required varies by lender and may also go up or down based on your credit score, DTI ratio, the type of property you’re financing and how many homes you have financed. It’s reasonable to expect that jumbo lenders will want to see proof of six to 24 months of cash (or liquid assets).
Closing costs for jumbo loans can be higher than for conventional or government-backed loans, especially in the case of non-qualifying jumbo mortgages, which aren’t limited in how much they can charge in upfront fees by either the CFPB’s rules nor Fannie and Freddie’s.
Most jumbo loans are manually underwritten, which means that — unlike the bulk of conventional or government-backed loans — they aren’t fed into a computer program that decides whether you qualify for the loan. Instead, an actual human (called an underwriter) evaluates your financial picture and your ability to pay back the loan you’re interested in.
Pros and cons of a jumbo mortgage
You can borrow above the conforming loan limit
You can get a fixed- or adjustable-rate loan
You could pay interest rates that are slightly less than or near conventional loan rates
You can avoid private mortgage insurance (PMI) if you make at least a 20% down payment
You’ll typically need at least a 20% down payment
You’ll need to have a significant sum in cash reserves
You may be taking on a more risky loan because jumbo loans have fewer federal rules limiting them
You may not save as much as you may hope at tax time, since the mortgage interest deduction doesn’t offer a higher limit for jumbo loans
Things you should know
Government loan programs typically don’t offer jumbo loans. But there is one exception: VA loans backed by the Department of Veterans Affairs (VA). For qualifying military borrowers with full entitlement, there is no loan limit on VA home loans.
Jumbo vs. conforming loan rates
Historically, interest rates on jumbo loans have tended to be higher than for conventional loans. However, in early 2022 something unusual happened: jumbo mortgage rates actually dropped below 30-year conforming loan rates, likely in response to increased demand from the investors who buy jumbo loans on the secondary market.
By the end of the year, things appear to have returned closer to normal, but still aren’t completely back to how we once knew them. When the gap between jumbo and conventional rates was at its widest in April of 2022, jumbo were 0.3326% cheaper. Fast-forward to November, and jumbo were less expensive by only about 0.0755%, and only for part of the month.