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What is a jumbo loan and when should you use one?

January 19, 2023, 6:47 PM UTC
Photo illustration of a couple meeting a real estate agent outside of a large modern home.
Jumbo loans provide more money to buy a home than traditional mortgages.
Photo illustration by Fortune; Original photo by Getty Images

If you’re shopping for a particularly pricey home or you live in one of the country’s more expensive communities, you may need to obtain a non-conforming mortgage—otherwise known as a jumbo loan. These loans can be useful because they allow you to borrow far more money for a home purchase than traditional mortgages do.

Obtaining a jumbo loan, however, can be challenging because there are stricter underwriting requirements and qualification guidelines than conforming mortgages. Applicants are typically required to have higher credit scores, savings account reserves, and a more substantial down payment. You may also pay a higher interest rate on a jumbo loan than a traditional mortgage. But for those purchasing a luxury property or who are home shopping in a region where home prices are especially steep, jumbo loans are an important option.

What is a jumbo loan? 

Jumbo loans are mortgages that exceed the standard or “conforming” loan limits for the area where you’re purchasing a home. Conforming loan limits are established annually by the Federal Housing Finance Agency (FHFA), and for 2023 the limit in most places is $726,200, but in more expensive regions of the country, it is $1,089,300.

As an example, in San Francisco County, California, the 2023 loan limit for a conventional mortgage in the city (which is one of the most expensive places to live in the country) is $1,089,300. Any loan above that amount would be considered a jumbo loan.

“Jumbo loans can help support consumers who are making larger purchases, typically in more expensive parts of the country,” says Brandon Snow, executive director of mortgage strategy for Ally Home.

Importantly, conventional loan limits vary from one county to the next, meaning the limit in one county might be significantly higher or lower than another depending on the overall cost of housing in the county. Prospective home buyers can research conforming loan limits in their county by visiting the Federal Housing Finance Agency (FHA) website.

Because they exceed conventional loan limits, jumbo loans are not purchased or guaranteed by Fannie Mae or Freddie Mac, the two government-sponsored mortgage enterprises. For that reason, jumbo loans are often considered riskier than traditional mortgages.

Who offers jumbo loans?

Jumbo loans are offered by nearly all mortgage lenders. Some of the well-known jumbo loan lenders include Wells Fargo, Rocket Mortgage, Ally Home, Chase, Guaranteed Rate, and Veterans United.

While these larger loans are generally widely available, the guidelines for getting approved and the interest rates associated with the loan may vary significantly from lender to lender.

“There may be less consistency across lenders for jumbo loan rates versus conventional mortgages,” says Snow. “That makes it even more important to shop around for the best jumbo loan option.”

The varying guidelines may even mean that while you’re rejected for a jumbo mortgage by one lender, you could still very well obtain approval for the same loan amount elsewhere.

“It’s important to speak with multiple lenders when you’re looking at a jumbo loan to understand how their unique guidelines and interest rates impact your ability to buy or work with a company…that has multiple jumbo options in-house,” says Jennifer Beeston, senior vice president of mortgage lending for Guaranteed Rate.

Qualifying for a jumbo loan

While the approval guidelines vary, it’s generally more difficult to qualify for a jumbo loan. Often you’ll need an excellent credit score, substantial cash savings or reserves, and minimal debt relative to your monthly income.

Low debt-to-income ratio

Debt-to-income ratio requirements (which is the amount of your monthly income that must be used for making debt payments) for jumbo loan applicants varies from one lender to the next. Some lenders may allow a slightly higher debt level than others.

In the case of Wells Fargo, for instance, the total debt-to-income ratio allowed for jumbo loans is lower than the maximum allowed for the lender’s conventional conforming mortgages. For non-conforming, jumbo loans, borrowers must have a DTI of 43% or less. But for other lenders, the DTI threshold may be higher.

“There are programs that can go up to 50% debt to income, but generally, I would recommend you try to stay under 40%, so you have the most options available,” says Beeston.

Good to excellent credit score 

As with any loan application, the higher your credit score, the more likely you are to be approved and to obtain the most favorable interest rates. In the case of jumbo loans, however, the minimum acceptable credit score is generally around 700.

“There are some jumbo programs available as low as 680, but you will have more options to choose from with a 720+ credit score,” says Beeston.

Taking steps to pay bills on time and maintaining low credit balances can help boost your score. And as you pay off new loans over time, your credit score will also improve as a result of a consistent payment history.

Significant cash reserves

Having ample cash reserves to cover mortgage payments in the event of a change in your financial circumstances is often another important factor in jumbo loan approval. However, the exact amount of reserves needed is another area that varies from one lender to the next.

“For instance, for the same loan amount, one jumbo lender may require 36 months [of cash reserves] whereas another will only require six months,” says Beeston. “It really depends on the loan amount and the  jumbo lender you’re working with so you should always get a second opinion.” 

How to repay a jumbo loan

Monthly payment amounts for jumbo loans are calculated in the same way as for conventional mortgage loans and include principal and interest, and, when an escrow account is in place, taxes and insurance. The repayment terms also mirror those of traditional mortgages—offering options such as a 15-year and 30-year fixed-rate timeline.

While some buyers may opt for a longer 30-year mortgage in order to keep monthly payments lower, others may choose a shorter, 15-year term in order to pay down the balance faster and save on interest over the life of the loan.

There may also be interest-only mortgage options available for jumbo loans, which can make the monthly payments for such a large loan more affordable because as the name indicates, borrowers are only paying the interest, not the principal, during the introductory period.

“Customers who receive a significant portion of their income in an annual bonus and those who have variable income may want to consider an interest-only loan, as it can help them match the monthly payment with their cash flow,” says Sue Barber of Wells Fargo Home Lending.

Pros and cons of using a jumbo loan to purchase a home 

While jumbo loans can be very useful, especially in some of the most expensive parts of the country, it’s important to fully understand how these mortgages work and the benefits and drawbacks they might offer for you and your unique situation.

Pros:

  • Allow you to borrow more money: The most notable benefit of a jumbo mortgage is that it provides buyers with access to more money for a home purchase.
  • You can purchase a larger home: With more money at your disposal, you’re able to buy the home you truly want or even have more home options to choose from.

Cons:

  • Higher minimum credit score: The minimum credit score requirement for a jumbo loan is often about 700, whereas, for conventional loans, it is slightly lower, at 620. 
  • Substantial cash reserves required: Jumbo loan borrowers are often required to have from six to 12 months income available cash reserves.
  • Steeper down payment: Jumbo loans have tighter approval requirements and may even require that applicants have a downpayment as high as 30%.

The takeaway 

Jumbo loans provide borrowers with access to far larger loan amounts, and in parts of the country where housing is especially expensive, these loans are critical. However, in order to qualify for a jumbo loan, you’ll need to meet stricter lending requirements that often includes a significant downpayment, ample cash reserves, an excellent credit score, and a low debt-to-income ratio. As with any type of mortgage, when considering a jumbo loan, it’s important to shop around with multiple lenders to get the best deal possible.

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