What is a jumbo loan?

In a nutshell

Jumbo loans are for homes that cost at least $766,550 across most of the United States, or $1,149,825 in some high-cost areas of the country.

• These home loans are called "jumbo loans" because they are in amounts that exceed conforming loan limits set by Fannie Mae and Freddie Mac.
• Since jumbo loans are in larger amounts than the average home sale, they come with more stringent down payment and credit score requirements.
• The term "jumbo loan" is used to describe the loan amount, but these home loans can still come with unique repayment terms and fixed or variable rates.

What is a jumbo loan?

Hence the name, a jumbo loan is a big mortgage. These home loans come in amounts that exceed conforming loan limits set by Fannie Mae and Freddie Mac and the regulator of these agencies, the Federal Housing Finance Agency (FHFA). In 2024, conforming loan limits come in at $766,550 across most of the United States, or $1,149,825 in some high-cost areas of the country.

The biggest difference consumers notice with jumbo loans comes in the form of more stringent approval requirements, but it's easy to understand why these come into play. Jumbo loans in amounts that exceed conforming loan limits cannot be purchased on the secondary market by Fannie Mae or Freddie Mac like other home loans can. This means the lender typically has to hold the mortgage for the life of the loan, and that requires a higher level of risk and commitment on their end.

It's also worth mentioning that the threshold for jumbo loans can increase from one year to the next to keep up with inflation and rising home costs. In fact, conforming loan limits for the majority of the country came in at $510,400 for one-unit residences in 2020. Twenty years ago in 2004, the conforming loan limit came in at $333,700 for single-family homes.

How does a jumbo loan work?

From a consumer perspective, a jumbo loan works similarly to any other home loan. Borrowers who need to access funding above conforming loan limits to purchase a one-unit residence can opt for a jumbo loan with varying repayment terms, such as 15 or 30 years. Interest rates can be fixed for the life of the loan, but it's also possible to fashion a jumbo loan as an adjustable-rate mortgage (ARM).

Not all lenders offer jumbo loans, so homebuyers may need to do some upfront research to find the right mortgage company for their home purchase.

Jumbo loan rates and limits

Some lenders let homebuyers borrow up to $3 million with jumbo loans, whereas others offer funding with jumbo loans of up to $2 million or less. There are also lenders that will work with buyers to finance up to $9 million or more depending on other factors like creditworthiness and down payments.

Jumbo loan rates can also vary dramatically by lender, and these loans may come with a higher interest rate than mortgages that fall within conforming loan limits. Then again, some lenders offer interest rates for jumbo loans that are on par with rates for home loans that meet conforming loan limits. Ultimately, this is a major reason to shop around and compare jumbo loan rates before you settle on a lender.

What are the requirements for a jumbo loan?

Jumbo loans require borrowers to meet a higher set of standards before they can qualify. Consider whether you can meet the following criteria before you apply for a jumbo loan.

Appraisals

Because jumbo loans are for higher than average loan amounts, meaning more is at stake, they typically require more detailed appraisals to prove the home is worth the higher cost. Some jumbo loan lenders may even require more than one home appraisal to get the deal to the closing table.

Cash reserves

Lenders also want borrowers who take out a jumbo loan to have more cash reserves than they would otherwise need to have. It's not uncommon to see lenders that require between three and 24 months’ worth of mortgage payments in a savings account, for example.

Credit score

Borrowers typically need to have a higher credit score for a jumbo loan than they would for a mortgage in a smaller amount, although requirements vary by lender. For example, some mortgage companies want jumbo loan applicants to have a minimum credit score of 700 or 740 before they will approve them for a home loan.

Debt-to-income (DTI) ratio

Lenders want to make sure you don't have a bankruptcy or foreclosure on your record before approving you for a jumbo loan. If you do, you may have to wait until these items fall off your credit reports before you can be approved.

Lenders also want to see low debt-to-income ratios below 43%.

Down payment

Jumbo loans typically require a minimum down payment of 10% of the purchase price of a home. In that case, borrowers will have to pay private mortgage insurance (PMI) until they have enough home equity for PMI to be removed.

How to apply for a jumbo loan

You'll apply for a jumbo loan just like you would any other type of mortgage. The following moves can help you prepare for the process.

Determine if you meet eligibility requirements

Take a close look at your personal financial situation to determine if you're a candidate for a jumbo loan. You will need to have a higher credit score (typically 700) to qualify, a down payment of at least 10% of the home price, a debt-to-income ratio (DTI) below 43% and ample cash reserves to qualify.

Compare the best mortgage lenders

Compare the best mortgage companies that offer jumbo loans to see what they're offering in terms of rates and terms. Ideally, you'll want to go with a lender that offers the most competitive interest rates and a repayment term that makes sense for your goals.

Gather required documentation

It can help to have documentation ready for a jumbo loan before you apply. Documents you'll need to have to prove your financial standing include:

• Tax returns from the past two years.
• W-2s from the last two years.
• Pay stubs from the previous 30 days.
• Bank statements from the previous 60 days.
• Profit/Loss statement and balance sheet for private businesses and self-employed applicants.
• Proof of other income (commissions, bonuses, investment income and so on).

Get prequalified

Once you settle on a mortgage lender and have your documents in order for a jumbo loan, you can inquire with the lender about getting prequalified. This can mean meeting with a mortgage lender in person, calling into a loan company to speak with a representative or applying for a jumbo loan online. Some lenders will even let you check your approval odds and see if you prequalify online in a matter of minutes.

What to consider before getting a jumbo loan?

Jumbo loans come with the same major considerations as any other mortgage, although you have to meet a more stringent set of requirements to get approved. Factors to keep in mind before you apply include whether you have the cash reserves, credit score and down payment to qualify for one of these loans, and whether you can truly afford the much higher monthly payments a larger home loan will require.

If you don't put down at least 20% of the purchase price of the home you're buying, you'll also have to pay private mortgage insurance (PMI) premiums that make your home loan even more expensive.

If the amount you need to borrow is fairly close to conforming loan limits, it could be worthwhile to come up with a larger down payment (if possible) so you can avoid having to take out a jumbo loan. Doing so can help you avoid the more stringent requirements to qualify, and you may be able to qualify for a lower interest rate.

What is the difference between jumbo loans and conforming loans?

What is a conforming loan? For the most part, conforming loans are mortgages that fall under conforming loan limits. As we already mentioned, these limits tend to increase over time based on inflation and increases in housing costs. In 2024, conforming loan limits are set at $766,550 across most of the United States or $1,149,825 in some high-cost areas of the country.

Aside from the fact jumbo loans are in amounts that exceed these limits, these loans have a stricter set of requirements for borrowers to meet. For example, credit scores need to be higher and borrowers need to have a bigger down payment and more cash reserves to qualify for a jumbo loan.

The AP Buyline roundup

Jumbo loans are mortgages in larger amounts, which makes sense when you consider the name. These home loans require borrowers to meet a higher set of standards in terms of their credit, down payment and other debts, but they work similarly to other home loans on the consumer end.

The big difference with jumbo loans takes place on the mortgage company side of the equation. These loans don't meet conforming loan limits, so they cannot be purchased on the secondary market and sold to investors as mortgage-backed securities. This means mortgage companies that offer jumbo loans often need to hold the loan for its duration, creating more risk on their part.

Frequently asked questions (FAQs)

What are the benefits of getting a jumbo loan?

Borrowers who utilize jumbo loans get the opportunity to purchase a more expensive home than they might otherwise get funding for. This can be important in areas of the country where home prices are high or the housing market is extremely competitive.

Do jumbo loans require a larger down payment?

Jumbo loans typically require a larger down payment than other types of mortgages. Many lenders need jumbo loan buyers to put down a minimum of 10% of the purchase price.

How do I get the best jumbo mortgage rate?

Make sure to shop around with several different lenders once you begin your search for a jumbo loan. While some lenders might charge higher interest rates to account for the increased risk they take on, others might extend more competitive rates in order to attract new customers.

Can I refinance my current jumbo loan?

You can typically refinance a jumbo loan if you meet the refinance requirements of a lender. However, you may find fewer lenders that are willing to refinance a jumbo loan compared to mortgage companies that refinance smaller loan amounts.