What Is A Jumbo Loan?

A jumbo loan is a mortgage loan that surpasses the limits set by the Federal Housing Finance Agency (FHFA). This puts jumbo loans in the non-conforming loans category (along with government-backed loans) – as opposed to the conforming loans category, which consists of all conventional loans (loans not backed by the federal government) that aren’t jumbo loans.

Nonconforming loans aren’t eligible for purchase by Freddie Mac or Fannie Mae – two government-sponsored enterprises (GSEs) authorized to purchase loans on the secondary mortgage market. The majority of jumbo loans are used to finance the purchase of a luxury property, real estate with a significantly high price tag, or a property in a hot real estate market.

Now, let’s take a deeper dive into jumbo loans so you can walk away knowing whether a jumbo loan is an option you might consider for the financing you need to buy a property.

How Do Jumbo Loans Work?

Jumbo loans work similar to conforming loans but have higher lending limits. If approved for a jumbo loan, you’ll receive your loan conditions, which will include your interest rate, repayment term and the size of your loan.

If you agree to the conditions of your jumbo mortgage loan, you’ll then make a down payment and pay closing costs, after which you’ll secure your funding and start making monthly payments on the loan amount until you’ve repaid it in full or refinanced.

Conforming Loan Limits

Whether you’ll need a jumbo loan depends on current conforming loan limits. The conforming loan limits are set by the FHFA each year and represent the maximum dollar amount that Freddie Mac or Fannie Mae will purchase or guarantee.

In 2024, the conforming loan limit for most of the continental U.S. is $766,550. However, in places such as Hawaii and Alaska (and certain counties in the continental U.S.), this limit increases to as much as $1,149,825 due to the higher median home value.

Jumbo Loan Interest Rates

Interest rates for jumbo loans trend a bit higher than mortgage rates for conforming loans. That’s because loan providers are taking on more risk by lending more money with a jumbo loan. In exchange for this added risk, lenders typically charge a slightly higher rate.

The mortgage interest rate for a jumbo loan typically runs anywhere from 0.25% to 1% higher than the rate for a conforming loan. All things considered, though, that’s not a terrible jump in rate to have access to the loan amount you need.

How To Qualify For A Jumbo Loan

Jumbo loan requirements are generally stricter than the requirements for approval on conforming loans and government-backed loans. Consider these factors when determining if you’ll qualify for a jumbo loan:

• Credit score: Lenders want to see a history of on-time debt repayment. Most lenders require a credit score of at least 700 to qualify for a jumbo loan, although some lenders will allow borrowers to qualify with a credit score of as low as 680.
• Down payment: While conforming loans allow for a down payment of as little as 3% of the purchase price, a jumbo loan lender will often require putting down 20% or more.
• Debt-to-income ratio (DTI): You’ll need a DTI that shows you have the monthly income to comfortably cover all of your monthly debt payments. While it’s possible to qualify for other loan programs with a DTI of 50% or even a little higher, you’ll likely need a DTI of 45% or lower to qualify for a jumbo loan.
• Cash reserves: Having a substantial amount of cash in your bank account increases your chances of getting approved for a jumbo loan. Your lender may require you to demonstrate cash reserves that are sufficient to cover mortgage payments for up to 1 year.
• The appraisal: Your lender will require you to get an appraisal on your prospective property to ensure the loan amount you’re requesting is in line with the property’s appraised value.
• Documentation: You’ll need documentation of your assets, income, and other financial information for lenders to verify.

Pros And Cons Of A Jumbo Loan

How To Get A Jumbo Loan

If you’ve determined you need a jumbo loan on a property you’re looking to purchase and believe you can qualify for one, you can plan on taking the following steps to obtain your financing.

1. Look For And Settle On A Lender

Not all jumbo mortgage lenders will necessarily offer you the same interest rate and repayment terms. You’ll want to find a lender that fits your needs and can provide you with favorable loan conditions.

2. Become Preapproved

The preapproval process is the first major step to getting a jumbo home loan. The lender will look at some of your financial information and conduct a hard pull of your credit to determine if you can move forward to the more formal approval process.

3. Submit A Formal Loan Application

Once preapproved, you can move forward with a formal loan application. At this point, if you haven’t already provided it, you’ll need to provide personal and financial information such as your payment stubs, assets and employment history.

4. Go Through Underwriting And Get An Appraisal

This is when the lender will review all of your documents and financial information to determine if they’ll finance your jumbo loan. During the underwriting process, a property appraisal will also be done to ensure the loan amount is appropriate for the property’s market value.

5. Secure Loan Approval

If the lender believes you’re in good financial standing and the appraisal and loan amount fit, you’ll be approved for your jumbo loan.

6. Close On Your Loan

This is when you’ll sign all final documents, and the loan is finalized. At the conclusion of your closing day, you’ll take ownership of the property.

Jumbo Loan Alternatives

If you want to finance a home that exceeds the conforming loan limit for your area, but you want to avoid a jumbo loan, you have a couple of potential options:

• Piggyback mortgage: This involves taking out a conventional loan up to the conforming loan limit, then taking out a second loan as a “piggyback” to finance the remaining principal balance. So, in a roundabout way, you’ll secure funding that exceeds the conforming loan limit while technically staying within that limit. As a result, you’ll have the money you need to get the home you desire.
• Owner financing: Also known as seller financing, this is when the property owner takes on the role of the bank and provides financing to you as the buyer. This way, you don’t have to go through the restrictions of a bank or financial institution. Seller financing can provide more flexibility, but most property owners aren’t interested in this type of financing, so it’s often hard to attain.

FAQs: Jumbo Loans

Should I get a jumbo loan?

Jumbo loans are ideal for borrowers looking to buy a high-value property. Given the strict requirements of jumbo loans, it’s essential to have significant savings for a down payment, ample cash reserves, a low debt-to-income ratio, and a strong credit score. In some cases, a jumbo loan can be a feasible alternative to a conforming loan if you need additional funding.

What is a jumbo mortgage?

A jumbo mortgage is a non-conforming mortgage product, meaning its amount is greater than the conforming loan limit. Jumbo loans usually require a larger down payment and have more rigorous requirements of a borrower’s financial profile than you’ll find with other conventional loans.

What is a nonconforming loan?

A nonconforming loan doesn’t conform to the guidelines of Fannie Mae and Freddie Mac, the GSEs that purchase loans and ensure that money is available for mortgage lending. More specifically, jumbo loans are larger than the loan amounts allowed by the FHFA, making them not eligible for purchase by Fannie or Freddie on the secondary mortgage market.

How much is a jumbo loan?

Jumbo loans come in various sizes and aren’t any particular amount. However, a jumbo loan is by definition a mortgage loan that exceeds the limit set by the Federal Housing Finance Agency (FHFA) for a property that has a particular number of units and is located in a particular area.

Are there alternatives to jumbo loans?

A jumbo loan isn’t the only way to finance an expensive property. You may be able to finance using a piggyback mortgage, which requires taking out multiple mortgages on the same property. Or, in the somewhat unlikely event that the seller is willing to provide it, you can opt for owner financing.

The Bottom Line: Jumbo Loans Aren’t For Everyone, But They Can Be Necessary

When looking to buy a new home, carefully consider the amount of financing you need. If it’s outside of the conforming loan limit, a traditional mortgage won’t provide the funding necessary to proceed with a purchase. However, if your finances are in order, a jumbo loan can offer a pathway to financing a new home, second home or investment property.

Are you ready to begin your home buying journey? Start the approval process today with Rocket Mortgage®.