Luxury Home Financed With Jumbo Loan

What Is A Jumbo Loan? The Complete Guide To Supersized Mortgages

Erin Gobler8-minute read
November 10, 2021

If you’re buying an expensive home, you might need a jumbo loan. After all, conforming loans can only be used for mortgages up to a certain amount.

When a mortgage reaches the maximum amount for a conforming loan, that’s where a jumbo loan takes over. A jumbo loan is a home loan that exceeds the limit for a conforming loan. And while jumbo loans may be harder to qualify for, they’re available through many lenders.

Let’s learn more about what a jumbo loan is, the requirements for a jumbo loan and what types of home buyers might need one.

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What Is A Jumbo Loan?

As already mentioned, a jumbo loan is a type of mortgage that exceeds conforming loan limits – which the Federal Housing Finance Agency (FHFA) determines.

Fannie Mae and Freddie Mac, although created by Congress to provide stability and liquidity to the housing market by purchasing mortgages from lenders, don’t by jumbo loans. Only conforming loans – or those that fall within the conforming mortgage loan limits – can be purchased by Fannie Mae and Freddie Mac.

Understanding Jumbo Loan Limits And Requirements

Each year, the Federal Housing Finance Agency (FHFA) sets limits on conforming loans. These limits represent the maximum loan amount for a mortgage that government-sponsored enterprises Fannie Mae and Freddie Mac can buy.

The FHFA updates its conforming loan limits each year to reflect changes in the average U.S. home price. In 2022, the maximum conforming loan amount for a one-unit property is $647,200. The FHFA also sets a higher limit for high-cost-of-living areas. The limit in those areas is $970,800, which is 150% of the normal conforming loan limit.

Jumbo Loan Rates

Like conforming loans, jumbo loans come in a variety of forms, including both fixed-rate and adjustable-rate loans. And as with conforming loans, the type of mortgage you choose will impact your rate.

Historically, jumbo loans have had higher interest rates than conforming loans to account for the increased risk the lender takes on. But in recent years, the gap between jumbo and conforming loan rates has narrowed. In fact, jumbo loans today have mortgage rates that are quite competitive with other mortgages. Often the difference is anywhere from 0.25% to 1%.

You might be wondering why jumbo loans don’t have significantly higher rates if they present more risk to the lender. While Fannie Mae or Freddie Mac can’t purchase these loans, they can still be securitized and sold on the secondary market, getting them off the originating bank’s books.

As with other types of loans, the interest rate on a jumbo loan will depend on various factors, including the loan amount, size of the down payment and creditworthiness of the borrower.

Conforming Versus Jumbo Loans

A conforming loan is one that meets the requirements set forth by the FHFA, Fannie Mae and Freddie Mac. In other words, it’s any loan that Fannie Mae and Freddie Mac can purchase.

While the FHFA limit is one of the requirements that a loan must meet to be considered conforming, it’s not the only one. Conforming loans must also meet certain requirements pertaining to credit score, debt-to-income ratio, down payment and more.

Because jumbo loans don’t meet the FHFA limits, they’re always considered non-conforming loans. But even some loans that do fall within the FHFA limits may be non-conforming if they don’t meet Fannie Mae and Freddie Mac’s other borrower requirements. Like jumbo loans, these other nonconforming loans may have stricter eligibility requirements because they present a greater risk to the lender.

While looking at the difference between jumbo and conforming loans, we should also examine how they compare with conventional loans. Although the terms conventional and conforming loan are often used interchangeably, they aren’t the same.

A conventional loan is any loan not backed by a federal government agency such as the FHA, VA or USDA. While many conventional loans are also conforming loans, a jumbo loan or another nonconforming loan could also be a conventional loan if it’s not government-backed.

Types Of Jumbo Mortgages

The term jumbo loan can describe any mortgage that exceeds the FHFA conforming loan limits. But even within that definition, several types of jumbo loans exist. Below, we’ll dive a bit further into the different types of jumbo loans and who they might be for.

Conventional Jumbo Loan

Most often, jumbo loans are conventional mortgages that buyers use to purchase a home. Jumbo loans to purchase a primary residence are available through many of the same lenders as conforming loans. However, given the larger loan amount and the fact that Fannie Mae or Freddie Mac can’t purchase jumbo loans, they have different requirements than conforming loans. We’ll delve into jumbo loan requirements below.

VA Jumbo Loan

While most jumbo loans are conventional loans – those not backed by the federal government – it’s possible to borrow a jumbo VA loan. A VA loan is insured by the Department of Veterans Affairs (VA). These loans are available to military veterans and service members who meet certain eligibility requirements. Like other jumbo loans, they allow borrowers to take out a loan exceeding the FHFA conforming loan limits.

Home Refinance

In addition to using a jumbo loan to buy a home, a borrower can use a jumbo loan for a home refinance. A refinance loan replaces a borrower’s original mortgage and is often used to get a lower interest rate, especially in a low-rate environment. The requirements for a jumbo loan refinance are similar to those of a jumbo loan used to buy a home.

Cash-Out Refinance

In addition to a regular home refinance, you may use a jumbo loan for a cash-out refinance. A cash-out refinance is one where you take out a new mortgage for more than your original loan amount and get the difference in cash.

You generally can’t borrow more than your home is worth, so the cash you receive is secured by your home – just like the rest of the loan. Mortgage lenders usually require you to maintain a certain amount of equity in the home during a cash-out refinance, and as a result, a cash-out refi won’t be available to all homeowners.

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Jumbo Loan Qualifications

As mentioned, jumbo loans are subject to different eligibility requirements than conforming loans. Rather than meeting the requirements set forth by the FHFA, Fannie Mae and Freddie Mac, jumbo loans have requirements set by the individual lender. These loans often have more complicated underwriting processes, too. Usually, a jumbo loan requires a finance expert to manually review a borrower’s financial history and assets.

Below are some of the eligibility requirements of a jumbo loan.

Credit Score

When seeking a jumbo loan, a higher credit score will likely help because the credit score requirements are often stricter than the requirements for a conforming loan. While you can often qualify for a conventional conforming loan with a credit score as low as 620, lenders sometimes require a score of 700 or higher for a jumbo loan.

Debt-To-Income Ratio

Your debt-to-income (DTI) ratio is the percentage of your monthly income that goes toward debt. There are two ratios that lenders consider. Your front-end DTI is the percentage of your monthly income that goes toward just your housing costs. Your back-end DTI is the percentage of your monthly income that goes toward your housing costs and all other debt combined.

Your DTI influences several outcomes, including how much loan you qualify for. Lenders often require a back-end DTI of 43% – 45% to qualify for a jumbo loan.

Cash Reserves Or Liquid Assets

Lenders like to see that borrowers have enough money to buy a home, especially for jumbo loans that are for larger amounts and therefore have larger monthly mortgage payments. Depending on your lender, you may be required to have 6 – 12 months of cash reserves to qualify for a jumbo loan.

Type Of Real Estate

Lenders may limit the type of property you can buy with a jumbo loan. Certain lenders only allow jumbo loans for the purchase of a primary residence, while others allow jumbo loans for investment properties and second homes. It’s important to note that multi-unit homes have higher conforming loan limits, meaning a jumbo loan may not be necessary.

Multiple Appraisals

No matter what type of loan you get, your lender is likely to require a house appraisal to ensure they aren’t lending you more than the home is actually worth. In the case of jumbo loans, lenders often require more than one appraisal.

Closing Costs

Closing costs are fees and expenses that borrowers pay at the time of closing to cover many of the administrative costs that go into a home purchase. Because a jumbo loan has different requirements than a conforming loan, lenders may charge higher closing costs.

Down Payment

When you buy a home, lenders require that you put down a certain percentage of the purchase price as a down payment. For a conforming loan, required down payments can be as low as 3% (though it may be higher depending on your credit score). With a jumbo loan, a lender will require at least 10%, and often 20% or more.

Proof Of Income

No matter what type of mortgage you get, your lender wants to be sure you have a reliable income to make your monthly payments. Lenders often require 2 years of tax returns or W-2 forms. Proof of income is especially important for a jumbo loan, which typically requires a large monthly payment.

When A Jumbo Mortgage Works

A jumbo loan is an important tool that allows borrowers to buy homes for more than the FHFA conforming loan limit. Without jumbo loans, no one could borrow more than $647,200 – or $970,800 in high cost of living areas – for a home. And in some parts of the country, this would leave many borrowers out of luck due to rising home prices.

A jumbo loan is well-suited for borrowers who want to buy a more expensive home. Borrowers of jumbo loans are usually high-income individuals, so they can meet the DTI requirements for these loans. Jumbo loans are only appropriate for people who believe their income will remain high for the foreseeable future, allowing them to afford the monthly payments.

When A Jumbo Mortgage Doesn’t Work

While jumbo loans can be a useful tool, they aren’t right for everyone. First, many people simply won’t qualify for this type of loan. Jumbo loans have stricter eligibility requirements that many borrowers won’t meet.

Additionally, jumbo loans aren’t appropriate for borrowers without a reliably high income. Even if your income is high in the current year, you shouldn’t seek to borrow a jumbo loan unless you expect your income to stay that way. Otherwise, you may end up defaulting on your home in the future.

The Bottom Line: A Jumbo Mortgage Can Be Right For High-Income Buyers

A jumbo loan is a type of mortgage that exceeds the conforming loan limits set by the FHFA. While these loans are less common than conforming loans, they can be helpful for wealthy borrowers or those in particularly expensive places like Hawaii or California.

As with any mortgage, it’s important to consider how a jumbo loan will affect your finances. Be sure the monthly payments would fit comfortably within your budget. If you aren’t certain how much you can afford to spend on a home, consult the Rocket Homes℠ home affordability calculator.

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Erin Gobler

Erin Gobler is a freelance personal finance expert and writer who has been publishing content online for nearly a decade. She specializes in financial topics like mortgages, investing, and credit cards. Erin's work has appeared in publications like Fox Business, NextAdvisor, Credit Karma, and more.