A jumbo loan is a mortgage that exceeds the conforming loan limit set by the federal government. These loans—meant to finance expensive properties—cannot be purchased or securitized by the government-backed entities Fannie Mae or Freddie Mac, which increases a lender’s risk because it will have to hold onto the loan for longer. You’ll pay more for a jumbo mortgage than a conventional home loan, and you’ll have to meet tougher qualification guidelines.
The conforming loan limit is adjusted annually. In 2020, the conforming limit is $510,400 in most parts of the U.S., but can be as much as $765,600 in higher-cost regions.
Who Needs a Jumbo Loan?
Buyers who don’t meet the Fannie and Freddie loan limit restrictions are either expected to increase the amount of their down payment or find a lender that will offer a second mortgage for the difference so that they can get conforming loans, says Andrina Valdes, COO of Cornerstone Home Lending in San Antonio, Texas. Otherwise, the borrower will need to seek a jumbo mortgage loan.
A jumbo mortgage is a loan designed for a borrower who needs to finance a loan balance greater than conforming loan lending limits. The operative word here is “borrow” or “finance”—it’s not the purchase price. You might also hear a jumbo loan referred to as a non-conforming loan. That simply means the loan doesn’t conform to Fannie Mae and Freddie Mac lending standards.
Jumbo mortgages can be used for primary homes, second or vacation homes or investment properties, and they are available as both adjustable- and fixed-rate loans.
What Are Jumbo Loan Qualifications?
Jumbo loan requirements can vary significantly by lender and applicant, but there are clear qualification differences between jumbo loans and conventional loans. Here’s what to expect:
- You’ll need a high credit score. Lenders require a minimum credit score of 680 to get a nod for a jumbo loan, although some mortgage bankers are more restrictive. Because this type of mortgage presents greater risk, lenders may demand better credit than on other types of home loans. For conventional mortgages, a FICO score of at least 640 may be sufficient.
- Lenders will demand a large down payment. You may be able to put down as little as 3% on some conventional loans. For jumbo loans, issuers may require a down payment of 15% to 30%. A down payment of at least 20% means you won’t have to pay private mortgage insurance (PMI).
- You’ll need a low debt-to-income ratio (DTI). Get your DTI by dividing your gross monthly income against your monthly debt payments. Typically, lenders expect a DTI of 43% or less, but jumbo mortgage lenders may require a DTI as low as 36%.
- Make sure you have assets in reserve. As a safeguard, lenders may require you to have up to one year worth of mortgage payments in reserves. These reserves can include things like a savings account and non-liquid assets, like other real estate or jewelry. When you apply for the mortgage, make sure you can provide paperwork to detail these assets.
- You may be charged a higher interest rate. Since jumbo loans pose more risk to lenders, you may be expected to pay more to finance the loan—as many as one to two percentage points higher than on a conforming loan.
- Lenders may require an additional appraisal. Expect to submit to a second appraisal of the home you are buying so that a loan issuer can confirm the property’s market value.
When Does It Make Sense to Get a Jumbo Loan?
For 2020, the limits for conventional or conforming loans are:
- $510,400 for a single-family home in most areas of the country
- $765,600 for high-cost areas, like Washington, D.C., and some parts of California, where single-family properties tend to cost more than national average
If you want to buy a large or luxury property, a jumbo loan could be the best way for financing this purchase.
Jumbo Mortgage Benefits
Jumbo mortgages may be attractive to borrowers looking to purchase homes priced above the current conforming loan limit. This will allow them access to more financing than they could receive with a conventional mortgage, says Chris Clemente, broker owner and vice president of Motto Mortgage Specialists in Jacksonville, Florida.
They also might be able to avoid breaking the full loan amount needed into multiple mortgages, as most homebuyers just want one mortgage loan. Additionally, jumbo loans may offer some unique loan features, including adjustable-rate and interest-only repayment terms that may not be available on a conforming loan.
Jumbo Mortgage Drawbacks
Given the higher loan amounts on jumbo mortgage loans, there is greater potential risk to the lender in the event of default, so the interest rates for jumbo loans are often higher than conforming loans. However, jumbo loans can be refinanced once the loan balance has been paid to below the Fannie Mae and Freddie Mac conforming loan limit, Clemente says.
Jumbo loans also may have tighter underwriting requirements such as a lower maximum on the DTA ratio a borrower is allowed to have and higher financial reserve requirements.