What Is a Jumbo Loan?

If you’re looking to purchase a property or a home in a more expensive area, it’s important to understand how jumbo loans work. Many individuals use jumbo loans to finance properties that exceed conventional loan limits. So, what is a jumbo loan, and who requires one? 

In this article, we’ll go over what jumbo loans are, how to qualify, and other considerations. 

What Is a Jumbo Loan?

A jumbo loan is a type of mortgage that surpasses the limitations the Federal Housing Finance Agency (FHFA) set for Freddie Mac and Fannie Mae. These two companies secure the majority of mortgages in the United States. Since Freddie Mac and Fannie Mae cannot guarantee these loans, there’s a higher risk for the lender and therefore, stricter requirements to qualify. 

What Is Considered a Jumbo Loan?

The limit for a jumbo loan differs from state to state and even county to county. In most parts of the United States, the jumbo loan limit is $726,200. However, more expensive areas have higher thresholds for a jumbo loan. For example, Orange County, California has a jumbo loan threshold of $1,089,300. 

How Do Jumbo Loans Work?

Jumbo loans work like traditional mortgage loans with set terms and a repayment schedule. Both fixed-rate and adjustable-rate jumbo loans are also available. Since jumbo loans can be risky for the lender, the requirements to qualify are stricter. 

How To Qualify for a Jumbo Loan

Below are factors you’ll need to qualify for a jumbo mortgage loan. 

Good Credit Score

While there’s no hard and fast rule, most lenders will require a credit score of 700 or above to qualify for a jumbo loan. The average credit score in the United States is 714, which is doable for most Americans. 

If you don’t have a good credit score but are looking to qualify for a jumbo loan, there are steps you can take to improve your credit score. 

Large Down Payment 

While the minimum down payment requirement for a jumbo loan is just over 10%, a lower down payment often comes with higher monthly payments and interest rates. Most lenders require a 20 to 35% down payment.

The exact down payment the lender requires may also differ depending on the loan size, your credit score and other factors. 

Low Debt-to-Income Ratio

Another factor that lenders will look at is your debt-to-income ratio, which is the monthly debt you owe divided by your gross monthly income. Most lenders require a debt-to-income ratio below 43% to receive a jumbo loan.

Enough Cash Reserves

You will need to show proof that you have enough cash reserves, or liquid assets, to cover about 6-18 months of mortgage payments. 

Extensive Documentation

Last but not least, lenders often require you to provide extensive documentation such as bank statements, pay stubs, and tax returns. These documents show the lender that you have steady income that is unlikely to change. 

Jumbo Loan Pros and Cons

There are a variety of pros jumbo loans can provide to future home buyers including: 

• The ability to purchase a luxury property. Jumbo loans provide you with the funds you need to purchase your dream home in your desired location.
• Competitive interest rates. Jumbo loan rates are similar and sometimes even slightly lower than traditional loan rates. 
• A single loan. Without jumbo loans, homebuyers would need to take out multiple mortgages. 
• The finances to make renovations. You can take out a jumbo renovation loan to cover the cost of the home plus any renovations you do. 

On the contrary, jumbo loans have the following cons that you should be aware of: 

• High costs. With a larger loan comes higher payments. Plus, you’ll likely have to pay higher closing costs and insurance. 
• Strict qualifications. Jumbo loans have stricter qualifications that you might not be able to meet.
• Large down payments. Jumbo loans typically require you to put a high percentage down. 
• Limited tax breaks.  The Internal Revenue Service (IRS) only allows you to deduct interest on mortgages up to $750,000. As a result, interest on a portion of your jumbo loan likely won’t be tax deductible. 

Jumbo vs. Conforming Loan Rates: Is There a Difference? 

In the past, jumbo loans had higher interest rates than conforming loans. However, in 2022, jumbo mortgage rates fell below conforming loan rates. While these rates have since even outed, jumbo loan rates have remained competitive with conforming loan rates, as seen in the graph below. 

Jumbo Loan FAQ

Below, we’ve answered some common questions about jumbo loans. 

What Are Jumbo Loan Limits?

While jumbo loan baseline limits vary from place to place, they range from $726,200 to $1,089,300 in more expensive areas. 

Are Jumbo Loans More Expensive?

While they have comparable interest rates to traditional loans, they may be more expensive since they have higher payments and closing costs. 

What Is the Down Payment on a Jumbo Loan?

The minimum down payment for a jumbo loan is 10.1%. However, most lenders require a down payment of 20 to 25%. 

Should You Apply for a Jumbo Loan? 

If the home you’re interested in purchasing exceeds the conforming loan limits in your area, a jumbo loan could be your best financing option. However, this option is only available to those with the financial resources to meet the strict qualifications, so it’s important to evaluate your financial situation to determine if it’s right for you. 

Start by checking your credit score for free to see if you meet the minimum requirement for a jumbo mortgage. 

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