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A jumbo loan covers a loan amount that exceeds the Federal Housing Finance Agency’s limits on loan size. You might need a jumbo loan if you’re buying a bigger home, or even if you’re buying a regular home in an expensive area. You can use a jumbo loan to buy a primary home, an investment property or a vacation home. The maximum loan size and qualifying guidelines will vary depending on location and lender.

As with other types of mortgages, lenders will evaluate factors like your credit score, payment history, savings, and income to determine your level of riskiness as a borrower. Your interest rate will be lower if you are perceived as more likely to repay the loan, and your rate will be higher if you are perceived as more likely to default.

You can control your qualifying factors, but you can’t control the other factors that will determine your interest rate. Mortgage bond investors will raise rates during periods of inflation, since inflation reduces the value of a mortgage’s fixed payments over time. 

Since rates are on the rise, you may consider a rate lock if you find a competitive rate.

To get a jumbo mortgage, you might have to jump through a few extra hoops. For instance, you’ll need to show you have a jumbo-sized salary and that you’ve saved enough to make the larger down payment, (as a percentage of the total amount financed) than is required for a conforming loan. Lenders often require a down payment of 10 percent or more for jumbo loans, compared with as little as 3 percent for a conforming conventional mortgage.

You might also need a better credit score. With a conforming loan, you might be able to get approved even with a score as low as 500. For a jumbo loan, lenders often require 700, at minimum.

Additionally, you might need to go through a more rigorous vetting process. Depending on the lender’s requirements, it might take longer to close on a non-conforming loan (including a jumbo loan) than it would to close on a conforming loan.

A jumbo loan might be a good fit for you if you’d rather finance a more expensive home than pay cash upfront. The main upside of a jumbo mortgage is that it expands your options. Large or unique homes, as well as typical homes in pricey areas, are priced well above conforming loan limits. If you wanted to borrow $1 million against a $1.5 million home in Hawaii, for example, you’d need a jumbo loan.

That said, jumbo loans have significant downsides. Jumbo loans represent a meaningful credit risk, for one. The higher loan amount also means higher closing costs. The down payment requirement is often higher as well, so even though you aren’t paying cash, you’ll still have to put a lot of money down upfront.