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What is a jumbo loan and when do you need one?

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A jumbo loan is a mortgage for an amount that exceeds the limits set by Fannie Mae and Freddie Mac, the government-sponsored giants that buy most U.S. home loans and package them for investors. If you’re buying a mansion — or just a regular home in a high-priced area like Silicon Valley — you might need a jumbo loan.

What is a jumbo loan?

As the name implies, a jumbo loan covers a larger-than-normal loan amount. Jumbo loans can be used for primary homes, investment properties and vacation homes.

The maximum size of a jumbo loan varies by mortgage lender and location. Qualifying guidelines can vary, too. Because the market for jumbo loans is smaller than the market for conforming loans, you might need to shop around a bit more to find a mortgage. The rates on jumbo loans often differ from conforming loan rates, too.

Aside from those distinctions, jumbo loans aren’t much different from traditional mortgages. Payment schedules and other details are generally the same. Borrowers can get fixed- or adjustable-rate jumbo mortgages with various term options.

While there were reports of lenders pulling back from jumbo mortgages early in the pandemic, the market for jumbo loans is mostly back to normal — and as of January 2022, rates on these types of loans are becoming even more favorable.

Jumbo loans vs. conforming loans

You’ll have more buying power with a jumbo loan compared to a conforming loan, but you’ll pay more in interest since your balance is higher.

Jumbo loan limits

If you want to borrow more than the loan limit for your area, you’ll need a jumbo loan. For 2022, the limit for conforming loans in much of the country is $647,200. However, the loan limits are higher in expensive areas. For much of California and for the New York and Washington, D.C., metro areas, for example, the 2022 loan limit is $970,800. Alaska and Hawaii also have that higher loan limit this year.

Jumbo loan limits by state

Jumbo loan rates

The rates on jumbo mortgages fluctuate and can be higher or lower than the conforming mortgage rate. Currently, the average 30-year jumbo APR for a home purchase is 5.790%, while the average 30-year conforming loan APR for a purchase is 5.840%, according to Bankrate’s survey of mortgage lenders.

Benefits of a jumbo loan

The main benefit for borrowers is that a jumbo mortgage allows you to borrow more than the limits imposed by Fannie and Freddie. For instance, if you’d like to borrow $1 million against a $1.5 million home, a jumbo loan makes it possible.

Some borrowers prefer to finance more of the home’s cost rather than tying up cash, making the jumbo mortgage a helpful financial tool and part of an overall investment strategy. You can still get a competitive interest rate and finance the home of your choice without being restricted by the dollar limit on conforming mortgages.

How to qualify for a jumbo loan

Jumbo lenders typically impose stricter underwriting guidelines than those extending traditional mortgages. Because the loans aren’t backed by Fannie or Freddie, jumbo mortgages pose more risk to the lender. On the flip side, lenders have more to gain — the dollar value of the loan is higher, and the lender gains an opportunity to sell additional services to these more affluent borrowers.

Jumbo loan requirements

There are three common hurdles borrowers must clear to get approved for a jumbo loan:

  • Larger income requirements – You’ll typically need a low-debt-to-income (DTI) ratio, which is the percentage of your monthly income that goes to debt payments. If your income is on the lower end and you have a hefty sum of outstanding debts, you might not qualify for a jumbo loan unless your credit score is excellent or you have a sizable amount of reserves.
  • Higher credit score – The jumbo loan credit score requirement is usually higher than what you’ll find with a conforming loan. “The average is around 740, although I have seen some as low as 660,” says Robert Cohan, president of Carlyle Financial based in San Francisco. “[But] if you’re high-leveraged and you have a low credit score, it’s going to be hard to get a jumbo loan.”
  • Heftier reserves – The down payment on a jumbo loan is typically 10 percent to 20 percent (and sometimes more). “Anything lower than a 10 percent down payment and you’re probably going to pay for it in higher rates,” Cohan says. Be prepared to also show enough reserves, or liquid assets, to cover between six and 12 months’ worth of mortgage payments.

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Written by
Jeff Ostrowski
Senior mortgage reporter
Jeff Ostrowski covers mortgages and the housing market. Before joining Bankrate in 2020, he wrote about real estate and the economy for the Palm Beach Post and the South Florida Business Journal.
Edited by
Mortgage editor
Reviewed by
Senior mortgage loan originator, American Fidelity Mortgage