A jumbo loan, also known as a jumbo mortgage, is a type of home loan that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac. These government-sponsored enterprises purchase the majority of mortgages originated by lenders in the U.S. and package them into mortgage-backed securities that are then sold to investors. However, Fannie Mae and Freddie Mac can only purchase loans up to a certain dollar amount, known as the conforming loan limit. This limit varies by county and is adjusted annually.
In most U.S. counties, the conforming loan limit in 2024 is $766,550 for a single-family home. In higher-cost areas like New York, San Francisco, and Honolulu, the conforming loan limit can be as high as $1,149,825. Any mortgage loan above these limits is considered a jumbo loan. Jumbo loans allow high-income earners to finance luxury properties and homes in competitive housing markets that cost more than the conforming loan limit.
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What is the Purpose of a Jumbo Loan?
A jumbo loan serves the purpose of allowing borrowers to finance expensive properties that exceed the conforming loan limits set by Fannie Mae and Freddie Mac. Without jumbo loans, borrowers would be limited in the amount they could borrow to purchase high-end real estate. Jumbo loans expand home financing options and provide liquidity in the luxury housing market.
The conforming loan limits typically only allow for the financing of mid-priced homes in moderately priced real estate markets. Jumbo loans pick up where conforming loans leave off, enabling borrowers to buy million-dollar homes, oceanfront property, high-rise condos, and other high-value real estate.
Jumbo loans gained significant traction after the 2008 housing crisis as the luxury real estate market recovered. Despite tighter lending standards, high net worth borrowers sought jumbo loans to finance large property purchases. The jumbo mortgage market has grown to account for around 15% of all U.S. mortgage originations.
Jumbo Loan Limits
The baseline conforming loan limit for most counties in 2024 is $766,550. The conforming loan limit rises to $1,149,825 in certain high-cost counties, as designated by the FHFA. Loan limits vary across the United States based on median home values in each local housing market.
In high-priced metro areas like San Francisco, New York, Los Angeles, and Washington, DC, the conforming loan limit is $1,149,825. In even more expensive counties within those metro areas, the limit can be even higher based on special provisions set by the FHFA.
Any mortgage loan above the conforming loan limit for a particular county is classified as a jumbo loan. For example, if you want to purchase a $1.5 million home in San Francisco, you would need a jumbo loan because the conforming limit there is $1,149,825. The portion of the loan above $1,149,825 would be considered the jumbo portion.
Jumbo loans are typically used to finance luxury homes priced between $1-2 million, but can reach even higher amounts, exceeding $5 million. Especially affluent borrowers can obtain jumbo mortgages up to $10 million from some lenders. The sky is almost the limit when it comes to jumbo loan amounts for the super wealthy.
Jumbo Loan Requirements
Since jumbo loans are not eligible to be purchased or guaranteed by Fannie Mae or Freddie Mac, lenders must hold these larger loans on their own balance sheets. This exposes the lender to greater risk, especially in the event a borrower defaults. As a result, jumbo loan qualification standards are more stringent compared to conforming loans.
Here are some of the typical requirements borrowers must meet to qualify for a jumbo mortgage:
- Credit score – Minimum 680-720 FICO score, often higher
- Down payment – Typically 10-20% down, sometimes as high as 30%
- Debt-to-income ratio – Maximum DTI around 36-43%
- Income – Strong income and earnings history
- Assets & reserves – Large cash reserves, often equal to 12 months mortgage payments
- Appraisal – Property appraisal confirming value
Jumbo loan borrowers need pristine credit, high income, and low debt levels. Providing a larger down payment in excess of 20% can help improve the chances of approval. Cash reserves are important to demonstrate the ability to handle the higher monthly payments.
An appraisal is critical to ensure the property is worth the loan amount and limits lender risk. Jumbo borrowers should also be prepared to fully document their financials with bank statements, tax returns, investment account records, and other verification of assets and income.
Jumbo Loan Rates
Borrowers seeking a jumbo mortgage will find that interest rates are generally higher compared to conforming loan rates for similar terms. On a 30-year fixed-rate mortgage, jumbo loan rates currently average 0.25-0.5% higher versus conforming loans.
The higher interest rate on jumbo loans is due to the additional risk lenders must take on when making these larger, non-conforming loans. However, the rate gap between jumbo and conforming loans has narrowed in recent years as the jumbo mortgage market has expanded. In some cases, jumbo loan rates may even be lower than conforming rates.
Lenders price jumbo mortgage rates based on credit score, loan-to-value ratio, debt-to-income ratios, reserves, and overall loan risk. Borrowers may be able to secure a lower jumbo loan rate by increasing their down payment, reducing their DTI, or taking other steps to decrease risk. Shopping with multiple lenders can also help find the lowest available rate.
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Pros and Cons of Jumbo Loans
Jumbo loans provide high borrowing capacity but also come with some distinct disadvantages. Here is an overview of the key pros and cons borrowers should consider when weighing a jumbo mortgage:
Pros
- Finance expensive properties above conforming limits
- Access to higher loan amounts
- Potentially lower rates than conforming loans
- Fixed and adjustable rates available
Cons
- Stricter approval requirements
- Generally, higher interest rates
- Large down payments often required
- Higher closing costs than conforming loans
- Not eligible for government loan programs
While jumbo loans allow borrowers to secure mortgages too large for conventional financing, the trade-off is higher rates and tougher qualification standards. Jumbos make sense for affluent borrowers who can comfortably handle the higher monthly payments and costs.
Types of Jumbo Loans
Jumbo mortgages come in a variety of loan terms and structures similar to conforming loans. Here are some of the most common types of jumbo home loans:
- Fixed-rate – Most jumbos are fixed-rate mortgages, meaning the interest rate stays the same for the full loan term. Terms are typically 15- or 30-years.
- Adjustable-rate – Jumbo ARMs have interest rates that periodically adjust based on market indexes. The initial rate is fixed for a set period before adjusting.
- Interest-only – For the first 5-10 years, payments cover only interest. After the interest-only period, principal and interest payments begin.
- Balloon mortgage – Payments based on a long amortization schedule with a balloon payment of the entire balance due after a shorter term of 5-7 years.
- VA Jumbo – Eligible veterans and service members can qualify for VA-guaranteed jumbo loans with more flexible requirements.
- Jumbo reverse mortgage – A reverse mortgage that exceeds conforming limits and allows older homeowners to tap home equity.
While fixed-rate loans are most common, jumbos offer adjustable rates and speciality products to meet the needs of high-net-worth borrowers. VA jumbo loans provide military home buyers with jumbo loan access at better terms.
Jumbo Loan Process
The process of applying for and obtaining a jumbo mortgage is relatively similar to other types of home loans. Here is a general overview of what borrowers can expect:
- Mortgage pre-approval – Get pre-approved to determine maximum loan amount and better compete with cash buyers.
- Shop for a home – Work with a real estate agent to search for homes priced above conforming limits.
- Make an offer – Submit a competitive offer and negotiate price and terms with the seller.
- Underwriting – Provide documents for income/asset verification and appraisal of the property.
- Loan approval – Receive final loan approval after underwriting. Lock in an interest rate.
- Closing – Review final details with your lender. Sign documents to finalize the mortgage.
- Move in – Complete the purchase, transfer utilities and move into your new luxury home!
While the process is relatively straightforward, jumbo borrowers should be prepared for a more rigorous application and underwriting process compared to conforming loans. Patience and working with an experienced lender can help ensure a smooth approval process.
Alternatives to Jumbo Loans
Some options exist for financing a luxury home purchase apart from a jumbo mortgage. Here are a few examples:
- Two mortgages – A first mortgage for the conforming loan limit amount, plus a second mortgage for the remainder. Also called an 80-10-10.
- All cash purchase – Use funds from your savings, investments, home sale proceeds or other sources to buy with cash.
- Home equity line of credit (HELOC) – Tap available equity in your current home with a credit line to provide added financing.
- Family loan – Borrow funds from family members; requirements vary but often more flexible than institutional loans.
- Private loan – Secure financing from an individual investor or investment group at negotiated terms.
- Hard money loan – Asset-based lending from a non-bank lender at higher rates and fees.
While viable alternatives exist, a jumbo mortgage from an institutional lender is preferable for most high-end property purchases. Jumbos come with fixed rates and extended repayment terms that benefit buyers.
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10 Tips for Getting Approved for a Jumbo Loan
Because jumbo loans involve stricter requirements, borrowers should take steps to improve their chances of getting approved. Here are 10 tips for securing jumbo mortgage financing:
- Aim for a 20% down payment – Providing substantial equity upfront appeals to lenders and can help reduce rates.
- Have cash reserves – Document 12+ months of mortgage payments available in your bank accounts.
- Get your FICO score over 700 – Aim for at least a 720 score, ideally 740+ for the best rates.
- Lower your DTI – Reduce monthly debts and housing payment burdens below 36% DTI if possible.
- Limit new credit inquiries – Too many new credit accounts can negatively impact your approval odds.
- Provide all documentation – Thoroughly verify income, assets, and employment history.
- Consider a co-signer – Adding a creditworthy co-signer can improve your chances.
- Shop with jumbo lenders – Find lenders that specialize in jumbo loans.
- Get pre-approved – Lock in your rate and show sellers you can close quickly.
- Be patient – The jumbo underwriting process takes time; stay organized and responsive.
Following these tips, being prepared, and working with an experienced loan officer can go a long way toward making your jumbo loan process as smooth as possible.
The Bottom Line
Jumbo mortgages are non-conforming home loans that exceed the lending limits set by Fannie Mae and Freddie Mac. By providing higher loan amounts, jumbos fill a void that allows affluent borrowers to finance expensive properties in high-cost markets. Jumbos come with stricter qualification standards and higher interest rates compared to conforming loans. But for luxury real estate purchases, they may be the only option aside from paying all cash.
Borrowers seeking a jumbo mortgage should aim for a 20% down payment, minimal debts, a 740+ credit score, ample reserves, and a patient approach to the application process. Working with an experienced jumbo loan officer can streamline the process and help secure favorable terms to make the financing of a high-end home purchase attainable and affordable.
Frequently Asked Questions About Jumbo Loans
Here are answers to some of the most common questions home buyers have about jumbo mortgage loans:
What is the minimum credit score for a jumbo loan?
Most jumbo lenders look for minimum FICO scores of 700 and above. A credit score of at least 720 is preferable, and 740+ scores will qualify for the very best rates. Some lenders may approve jumbos with scores as low as 680, but below 700 will be challenging.
How much income do you need for a jumbo loan?
There is no set income threshold, but most jumbo borrowers have high incomes. Many lenders look for gross annual income of around $200,000-$300,000 to comfortably qualify borrowers for $1-2 million jumbo loans. Jumbo loan amounts scale with income, so multimillion dollar loans require ultra high earnings.
How much money do you need for a down payment on a jumbo loan?
Jumbo lenders often look for down payments between 10-20% of the purchase price, sometimes even 30%. The larger the down payment, the better the chances of approval. At a minimum, plan for 10-15% down, but 20-30% is ideal if you can afford it.
What debt-to-income ratio is required for a jumbo loan?
Maximum DTI requirements for jumbos generally fall in the 36-43% range. The lower your DTI, the better. Some lenders impose firm DTI caps of 36% for jumbos. Keeping your DTI at 36% or below will provide the best approval odds.
How much in assets do you need for a jumbo loan?
Jumbo lenders want to see substantial assets and cash reserves. Plan on having liquid assets equal to at least 12 months of mortgage payments. Retirement accounts, investments, and other assets are also considered to assess your overall financial strength.
Can you get a jumbo loan for an investment property?
Yes, jumbo loans are available not just for primary residences but also for financing investment properties or vacation homes. Investment property jumbos require even larger down payments and higher reserves. Rental income is used to help qualify for the mortgage payments.
Should I get a fixed or adjustable jumbo loan?
Fixed-rate jumbos are preferable for most borrowers, providing certainty of monthly payments for the long run. ARM jumbo rates currently start lower but leave you exposed to the risk of rising interest rates over time as the loan adjusts.
Can I get a jumbo loan with a cosigner?
Yes, adding a cosigner with good credit and income can improve your chances of getting approved for a jumbo. The cosigner becomes equally responsible for repaying the mortgage, so they must be willing to take on this obligation.
How much more interest will I pay on a jumbo vs. conforming loan?
Based on current rates, you can expect to pay about 0.25-0.5% higher interest on a jumbo loan relative to a conforming loan with similar terms. The rate gap has narrowed recently, but you’ll still pay moderately more in interest with a jumbo.
Can I get a jumbo loan to refinance and cash-out home equity?
Cash-out jumbo refinances are available but require 50-60% equity in the home to qualify for the maximum loan amount. This allows you to tap equity while keeping sufficient collateral backing the new jumbo mortgage.
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