Jumbo Mortgages
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 is $647,200 in most counties, as determined by the Federal Housing Finance Agency (FHFA). Homes that exceed the local conforming loan limit require a jumbo loan.
For 2022, the maximum limits for conforming loans are:
- $647,200 for a single-family home in most areas of the country.
- Up to $970,800 for high-cost areas where single-family home prices tend to be above average. When setting conforming loan limits, the FHFA has defined high-cost areas as places where 115% of the local median home value is more than $647,200.
Also called non-conforming conventional mortgages, 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. Jumbo loans are typically available with either a fixed rate or an adjustable rate, and they come with a variety of terms.
Why jumbo loan limits matter
If the amount you want to borrow goes beyond the limits of a conforming loan and you need to get a jumbo loan, your lender may require:
- A stronger credit score. The minimum credit score for a jumbo loan is typically at least 680, but some lenders may require an even higher one. The higher your credit score, the lower your interest rate is likely to be.
- More cash in the bank. Knowing you have cash reserves, and not too much debt, makes lenders more likely to approve your jumbo loan.
- A larger down payment. Requirements vary by lender and depend on your financial history.
- An extra appraisal. Some lenders may require a second opinion on the home’s value to be sure it’s worth the amount you’re borrowing.
- Additional fees. Since you’re borrowing a larger amount, there may be some extra steps in the loan process, leading to higher closing costs.
- Higher interest rates. Although this can fluctuate based on market conditions and individual lender offerings, jumbo loan rates may be higher than those for conforming loans.
Qualifying for a jumbo loan
Underwriting criteria for jumbo loans are stricter because the loans are larger and riskier for lenders.
Credit score
Lenders may require your FICO score to be higher than 700, and sometimes as high as 720, to qualify for a jumbo loan.
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. Some lenders have a hard cap of 45% 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 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.
Appraisals
Some lenders may require a second home appraisal for the property you’re planning to purchase.
Jumbo loans vs. conforming loans
The key difference between a jumbo mortgage and a conforming loan is the size of the loan. For a thorough look at the two, and the pros and cons of each, read about the differences between conforming and non-conforming loans.
Among the other factors that differentiate jumbo loans from conforming loans:
Larger down payment
While low down payments are common on conforming loans, jumbo loans are more likely to require a down payment of at least 20%, though some lenders may go as low as 10%.
Potentially higher interest rates
Jumbo Mortgage Rates may be slightly higher than those on conforming loans, depending on the lender and your financial situation. However, many lenders can offer jumbo loan rates that are competitive with rates on conforming loans — and some may even offer slightly lower rates depending on market conditions, so make sure to shop around.
Higher closing costs and fees
Because jumbo loans are bigger and there are some extra qualifying steps, expect higher costs at the closing table.
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