What Is a Jumbo Loan?

Buying a home is a major expense for many Americans, but some buyers need to borrow more money than others to make it happen. For these home buyers, jumbo loans may be an option.

You could use a jumbo mortgage loan to finance a home beyond limits imposed on Federal Housing Administration, Fannie Mae, and Freddie Mac loans.

In this Review:

What is a jumbo mortgage?
Jumbo loan limits
Benefits of jumbo loans
Downsides of jumbo loans
Is a jumbo mortgage loan right for me?
How to get a jumbo home loan
Refinancing a jumbo loan

What is a jumbo mortgage?

Jumbo mortgage loans are a type of mortgage. These conventional mortgages exceed the lending limits Fannie Mae and Freddie Mac are allowed to issue.

Because they can’t be purchased by either of these government-sponsored organizations, jumbo loans are riskier for lenders to issue. This typically means higher interest rates and more costs for jumbo loan borrowers.

Conforming vs. non-conforming: What’s the difference?

Conventional mortgage loans fall into two categories: conforming or non-conforming. Conforming loans fall under the maximum loan limits set by Fannie Mae and Freddie Mac. They must also adhere to other rules to qualify for Fannie or Freddie backing.

Non-conforming loans can exceed Fannie Mae and Freddie Mac limits and do not need to adhere to conforming loan rules. Because these loans are not standardized, their terms and qualifying standards can vary from lender to lender.

Jumbo loans are non-conforming mortgages.

Jumbo loan limits

In most places, the 2019 jumbo loan limit is $484,350 for a single-family property, though in some high-cost areas, such as in California or New York, the maximum is much higher. In parts of California, for example, conforming loans can go as high as $726,525, and jumbo loans begin after that point.

The limit is determined by median home values and property size. To see conforming loan limits in your area, check out the Federal Housing Finance Agency’s website.

There are no sweeping limits on jumbo loans. The loan amount you can qualify for depends on the lender you choose and your credit history.

Benefits of jumbo loans

The obvious advantage of a jumbo loan is that it can help you finance a higher-priced piece of real estate. If you live in a high-cost housing market or want a more expensive home, a jumbo loan could help you purchase it.

Because jumbo loans (and non-conforming loans in general) afford more flexibility to the lender, they may also be beneficial if you have a complicated financial or employment situation that would otherwise make it difficult for you to get a loan.

Downsides of jumbo loans

The biggest disadvantage of jumbo loans is that they’re not guaranteed by Fannie Mae and Freddie Mac. This means the lender has no protection if you fall behind on your payments, making the loan riskier for the lender.

Lenders usually account for this risk by charging higher mortgage rates on jumbo loans—although this is not always the case.

Because of this risk, jumbo home loans are also harder to qualify for than other mortgage options. They require higher credit scores, bigger down payments, and more in cash reserves. Some lenders also require two appraisals for jumbo loans.

Is a jumbo mortgage loan right for me?

If you’re considering a jumbo mortgage loan, it’s important to have a clear view of your current and future financial picture.

First off, you’ll need significant upfront cash to secure a jumbo loan, as well as plenty in the bank. Most lenders require at least 20% down, though it could be even more.

Before applying, make sure you have enough to cover your down payment, closing costs, cash reserve requirements, and your expected monthly payments and maintenance costs.

Additionally, consider your future finances. If you’re a recently graduated doctor or lawyer, for example, then you can likely expect to be financially comfortable for the long haul. If your career or income is less predictable, a jumbo loan may be too big a risk to take on.

How to get a jumbo loan

As with any mortgage, you’ll need to fill out an application for your jumbo loan, submit various forms of documentation, and agree to a credit check. See below for more information on eligibility requirements, but note that these will vary by lender.

Eligibility

Because jumbo loans are riskier than other mortgages, lenders will only approve borrowers who are safe bets—meaning they have good credit scores, manageable monthly debts, solid income, and a decent amount of cash to put down.

Credit score

Most mortgage lenders will want to see at least a 720 credit score for a jumbo loan. Some may go as low as 680, though they may charge higher fees as a result.

Debt-to-income ratio

Debt-to-income ratio requirements vary greatly. Some lenders ask for DTIs as low as 36%, while others will go as high as 43%. Keep in mind that this is a back-end DTI, which would include your future mortgage payments.

Down payment

The gold standard is a 20% down payment on jumbo loans, but some lenders may require more. In some cases, mortgage lenders may accept down payments as low as 10%, though these loans will usually come with higher interest rates and fees.

Cash reserves

Most mortgage lenders have a cash reserve requirement for jumbo loan borrowers. Generally, they want to see at least six to 12 months of future mortgage payments in the bank before they’ll approve the loan. (This can’t include any funds designated for the down payment or closing costs.)

Application

The application process for a jumbo loan is similar to that for any mortgage loan application. You’ll fill out a form, agree to a credit check, and submit the required financial documentation. This will usually include tax returns, W-2s, paystubs, bank statements, and more.

Your lender will also need your ID and employment information. You might need to pay an application and credit report fee before moving forward.

Comparison is key

As with any financial product, it’s important you shop around before getting a jumbo loan.

Aim to get at least three quotes from the best jumbo mortgage lenders, and compare each on interest rates, fees, terms, and overall closing costs.

Most lenders offer quick online applications, so getting an extra quote or two should only take a few minutes. And ultimately, it could save you thousands.

Refinancing a jumbo loan

You can refinance a jumbo loan just as any other type of mortgage loan. Depending on how much your loan balance is, you can refinance into a new jumbo loan or into a conforming or FHA loan.

>> Read more: Best Mortgage Refinance Companies

You might consider refinancing your jumbo loan if:

You have an adjustable rate and the fixed-rate period is about to expire.
Your existing loan’s interest rate is higher than the going rates.
Your current loan balance falls below the conforming loan limit in your area.
You want to tap your home equity to pay for home improvements or other expenses.

Refinancing will come with the closing costs just as your initial mortgage did, so be prepared to pay at least 2% to 5% of your new loan balance upfront. Our mortgage refinance calculator can help you determine your monthly costs.