What is a jumbo loan and am I eligible?
A jumbo loan is a large mortgage that comes with strict requirements
Jumbo loans aren't just for the rich and famous. In fact, with the conforming loan limit for 2023 set at $726,200 in most counties, more and more people are finding themselves needing to finance properties that exceed this limit. That’s especially true in expensive housing markets, where median home prices can easily surpass the conforming loan limit.
Understanding what a jumbo loan is and how it works can help you confidently assess whether this type of mortgage is right for you.
Key insights
- A jumbo loan is a mortgage that exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA).
- Conforming loan limits vary by location and are adjusted each year to account for changes in home prices.
- If the amount you need to borrow for your home is higher than the conforming loan limit in your area, you may need to consider a jumbo loan.
- You typically need an excellent credit score, a low debt-to-income ratio and a sizable down payment to qualify for a jumbo loan.
What is a jumbo loan?
A jumbo loan is a type of mortgage that exceeds the conforming loan limits set by the FHFA. Because jumbo loan amounts exceed conforming loan limits, they are sometimes referred to as “non-conforming loans.”
For 2023, the general conforming loan limit for most of the U.S. is $726,200, while higher-cost areas, like certain parts of Hawaii and Alaska, have a loan limit of $1,089,300.
Why jumbo loans exist
Jumbo loans are a good fit for HENRYs, an industry acronym for “high earners, not rich yet.” To qualify for a jumbo loan, you’ll need to be in a comfortable financial situation with a strong credit history.
How does a jumbo loan work?
Jumbo loans are used to finance expensive properties that go beyond the limits of regular mortgages. The government sets these limits, and they can vary depending on where you live.
Here’s a closer look at how jumbo loans compare to conforming loans:
Application process
Lenders may require you to submit more extensive financial records for a jumbo loan than you would for a conforming loan. Some jumbo loans may require two home appraisals rather than one, and the closing process may take longer than it normally would for a conforming loan.
» MORE: How to qualify for a mortgage
Maximum loan amounts
When you might need a jumbo loan
- Homes in particularly expensive areas
- Investment properties
- Custom-built homes
- Luxury homes
- Second homes or vacation homes
“A jumbo loan should only be considered by borrowers with substantial income, assets and excellent credit,” said Lawrence Sprung, a certified financial planner and the founder of Mitlin Financial. This is because jumbo loans are larger and more financially burdensome than conforming loans, and they’re also more difficult to refinance. These elements make jumbo loans riskier than conforming loans.
“The best way to mitigate these risks is to make sure you have enough income, assets and financial wherewithal to withstand and not be affected by these potential risks,” Sprung explained.
Example of how a jumbo loan works
If your down payment is at least $123,800, you would still qualify for a conventional mortgage because your loan amount would be $726,200.
However, if your down payment is smaller than this, you would need a loan amount greater than $726,200. In that scenario, you’d most likely need to take out a jumbo mortgage to purchase the property.
Jumbo loan requirements
Jumbo loan requirements typically include:
- A high credit score: Lenders usually want to see a credit score of at least 700 to 720 for a jumbo loan, though some may require a minimum score of 680. Aim to improve your credit score to around 740 or more to increase your chances of approval.
- A low debt-to-income (DTI) ratio: Most jumbo loan lenders prefer a DTI below 38%. But if you have excellent credit and a large down payment, you may qualify with a DTI of up to 43%.
- A sizable down payment: Lenders usually require at least 10% to 20% of the home's purchase price as a down payment for a jumbo loan. That said, some lenders require 25% or 30%, while others may allow 5% or 10% with a higher interest rate. Note that a lender may set its down payment minimums based on loan amounts, such as requiring a minimum down payment of 10% for $2 million jumbo loans.
- Significant cash reserves: You should have enough savings to cover anywhere from a few months to over a year's worth of mortgage payments. Lenders want to ensure you have enough liquid assets to meet your loan obligations in the event of an unexpected change in circumstances, like a job loss. Fortunately, some lenders may consider assets held in investment and retirement accounts to be "liquid enough."
- A stable employment history: Lenders like to see at least two years of steady employment with the same employer, although there are exceptions. You'll typically need to provide documents such as tax returns, W-2s, bank statements and pay stubs to validate your income.
- A low loan-to-value (LTV) ratio: A high LTV ratio is risky for the lender, so you’ll generally need an LTV of around 80% or lower to secure favorable rates on your jumbo loan.
» MORE: Mortgage pre-qualification vs. preapproval
Comparing jumbo loans to conforming loans
This table highlights the primary differences between jumbo and conforming loans:
| Category | Jumbo loans | Conforming loans |
|---|---|---|
| Loan limit | Over FHFA-set limit | Up to FHFA-set limit |
| Credit score | Typically 700 or higher | Typically 620 or higher |
| Down payment | Usually 20% or more | As low as 3% for conventional loans |
| DTI ratio | 43% or lower | 43% to 50% (depending on the loan) |
Jumbo loan pros and cons
Although jumbo loans can help you secure financing for an expensive home, they also tend to come with strict qualification requirements and high monthly payments. Here are some of the advantages and disadvantages of jumbo loans:
Pros
- Few usage restrictions: You can take out a jumbo mortgage for primary residences, vacation homes and investment properties.
- High loan limits: A jumbo loan might be the only way to get the keys to your dream home in an expensive housing market.
- Reasonable interest rates: Jumbo loan rates can be lower than conforming loan rates for borrowers with exceptional credit scores and very low LTV ratios.
- Similarities to conforming loans: Most lenders offer a comparable range of options for both jumbo loans and conforming loans, such as adjustable-rate, fixed-rate and interest-only mortgages.
Cons
- High down payment: Jumbo loans often require a down payment of 20% or more, which can be steep for many homebuyers.
- Difficult approval process: You’ll likely need a high credit score and a particularly strong financial profile to qualify.
- High monthly payment: It may be unrealistic to repay a large loan amount if you also have a high interest rate and/or need to pay for private mortgage insurance (PMI).
- Limited tax deductions: Interest deductions apply to mortgages of up to $750,000, which may be below your jumbo loan amount.
FAQ
What is the down payment on a jumbo loan?
A jumbo loan down payment will usually range from 10% to 20% of the loan amount, depending on the lender's requirements and the borrower's financial situation. A $1 million jumbo loan means you will likely need $100,000 to $200,000 for a down payment.
Does a jumbo loan affect your credit?
Like any other loan, applying for a jumbo loan will result in a hard inquiry on your credit report. This may temporarily cause your credit score to decrease. Over time, a jumbo loan may cause your credit score to either increase or decrease, depending on whether or not you make consistent and on-time loan payments.
What is a super jumbo loan?
In technical terms, a super jumbo loan exceeds $1 million, while a regular jumbo loan is less than $1 million but greater than the conforming loan limit. However, in reality, the term “jumbo loan” is often used to describe both types of mortgages.
What is a piggyback loan?
A piggyback loan is an alternative financing option for those who want to avoid paying for private mortgage insurance (PMI) or making a sizable down payment on a jumbo loan. It involves taking out two separate loans — a primary mortgage and a smaller secondary loan (a "piggyback" loan). For example, if you need a 20% down payment but only have enough savings for a 5% down payment, you could potentially take out a piggyback loan for the remaining 15%.
Bottom line
A jumbo loan is a special type of mortgage for people who want to buy expensive property. It's called "jumbo" because it goes beyond the loan amount limits set for regular mortgages. Understanding the requirements and preparing accordingly can make the process smoother when applying for a jumbo loan. Always research lenders and compare loan terms to find the best option for your financial situation.
Article sources
- Federal Housing Finance Agency, “ FHFA Announces Conforming Loan Limit Values for 2023 .” Accessed May 19, 2023.
- Consumer Financial Protection Bureau, “ Conventional loans .” Accessed May 19, 2023.
- Consumer Financial Protection Bureau, “ What is a ‘piggyback’ second mortgage? ” Accessed May 19, 2023.
You’re signed up
We’ll start sending you the news you need delivered straight to you. We value your privacy. Unsubscribe easily.