Jumbo Loans: When a Regular Mortgage Isn’t Enough
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What is a jumbo loan?
A jumbo loan is a mortgage used to finance properties that are too expensive for a conventional conforming loan. The maximum amount for a conforming loan in 2024 is $766,550 in most counties, as determined by the Federal Housing Finance Agency (FHFA). Homes that exceed the local conforming loan limit require a jumbo loan.
Jumbo loans are considered riskier for lenders because these loans can’t be guaranteed by Fannie Mae and Freddie Mac, meaning the lender is not protected from losses if a borrower defaults. Since they can't be resold, jumbo loans generally remain on the lenders' own books, making them a type of portfolio loan.
How does a jumbo loan work?
Jumbo loans work the same way as any other mortgage — there's just more money involved. Jumbo loans can be 30-year loans or you can opt for a shorter term. Jumbo loans are available with either a fixed interest rate or an adjustable rate.
Because jumbo loans are somewhat of a specialty, it may make sense to seek out a lender that does a strong business in them. A traditional bank could be a good option, because banks looking to build relationships with well-heeled borrowers sometimes offer lower interest rates on jumbo loans as an incentive to become a client.
Jumbo loan requirements
Underwriting criteria for jumbo loans are usually stricter than for conforming loans because they’re larger and riskier for lenders. But because lenders aren't beholden to FHFA standards, each lender can set its own requirements — and for certain borrowers, they may bend their own rules. With so much variation, it definitely makes sense to research multiple jumbo loan lenders.
Down payment
Jumbo loans tend to require a significantly larger down payment than conforming loans. Jumbo loan down payments usually start at 10%, but depending on your other assets, you could be required to put down more — perhaps even going above 20%.
Credit score
Lenders may require your FICO score to be higher than 700, and sometimes as high as 760, to qualify for a jumbo loan. As with any home loan, a stronger credit score is likely to be beneficial.
Debt-to-income ratio
Lenders will also consider your debt-to-income ratio (DTI) to ensure you don’t become over-leveraged, though they may be more flexible if you have plentiful cash reserves or otherwise solid financials. Some lenders have a hard cap of 43% DTI, however.
Cash reserves
You’re more likely to be approved for a jumbo loan if you have ample cash in the bank. It’s not uncommon for lenders to ask jumbo loan borrowers to show they have enough cash reserves to cover up to one year of mortgage payments.
Documentation
To prove your financial health, you’ll need extensive documentation, perhaps more than for a conforming loan. You should be prepared to hand over your full tax returns, W-2s and 1099s when applying, in addition to bank statements and information on any investment accounts. Jumbo loans often go through manual underwriting, so you'll have an actual human poring over your financial details.
Appraisals
Some lenders may require more than one home appraisal for the property you’re planning to purchase. The appraisal ensures that the home you're buying is actually worth what you're paying for it, reassuring the lender that the amount they're letting you borrow is worth it. It's not surprising that for a more costly home, the lender wants to be extra sure about the value.
» MORE: Jumbo loan calculator
Pros and cons of jumbo loans
Whether you need a jumbo loan may be decided for you simply by the cost of the property you intend to buy. But if you're shopping at a price point where you could end up on either side of the conforming loan limit for your area, consider these advantages (and disadvantages) of jumbo loans.
Pros
Potentially lower interest rates. Jumbo loans sometimes offer lower interest rates than conforming loans, because lenders may be willing to compete on rates to win a certain client.
Ability to borrow more money. If you live in a high-cost area, a jumbo loan might be what it takes to purchase a property. Having a bigger loan saves you from having to come up with a large enough down payment to make a conforming loan cover your mortgage's cost.
Loan options. Multiple types of jumbo loans are available. You can choose your term and whether you want an adjustable or fixed rate. If you're a current or former service member, you can also get a jumbo VA loan.
Cons
Larger down payments. While low down payments are fairly common on conforming loans, jumbo loans are likely to require a down payment of at least 10%.
Higher closing costs and fees. Because jumbo loans are bigger and there are some extra qualifying steps, expect higher costs at the closing table.
Potentially riskier loan. Even though jumbo loans don't have to follow the rules of conforming loans, jumbo loans can still be qualified mortgages. That means they follow safeguards from the Consumer Financial Protection Bureau. If your jumbo loan is a non-qualifying or "non-QM" loan, you may need to be more vigilant to ensure you're getting a good deal.
Jumbo loans and conforming loan limits
The loan limit for conforming loans varies by county because some real estate markets are much pricier than others. For 2024, the conforming loan limit for one-unit homes in most counties nationwide is $766,550. However, in “high-cost areas,” especially in the Northeast and on the West Coast, conforming loan limits are expanded up to $1,149,825.
Find local conforming loan limits
Ways to get the best jumbo mortgage rates
When you’re shopping for a jumbo loan, it’s smart to make sure your financials are in as good a shape as possible. This means bolstering your savings and pulling your credit reports from the three main credit reporting agencies — Equifax, Experian and TransUnion — then addressing any errors you find. You might also pay down any larger balances.
Because jumbo loans tend to have stricter requirements than conventional or government-backed loans, anything you can do to improve your financial profile will also likely improve your rate offers.
» MORE: See today's jumbo mortgage rates
Once you’re feeling confident about your application, compare mortgage rates between at least three jumbo lenders. Even small differences in the rate you pay could save you thousands of dollars over the term of a home loan.
If the rates you’re quoted for jumbo loans are higher than those for conventional loans, consider increasing your down payment — if you’re able — to avoid taking out a jumbo loan altogether. If your savings don’t support this, an 80-10-10 could help you get there. With an 80-10-10 loan, also called a piggyback loan, you make a 10% down payment, then take out two mortgages. The first mortgage is for 80% of the home's cost (putting you below the jumbo loan threshold); the second mortgage is for 10% of the home's cost.
