Jumbo Loans: When a Regular Mortgage Isn’t Enough

You may need a jumbo loan for homes that cost more than $510,400. Jumbo loans have stricter qualification rules.

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What is a jumbo loan?

A jumbo loan is a mortgage used to finance properties that are too expensive for a conventional conforming loan. The maximum amount for a conforming loan is $510,400 in most counties, as determined by the Federal Housing Finance Agency (FHFA). Homes that exceed the local conforming loan limit require a jumbo loan.

Also called non-conforming conventional mortgages, jumbo loans are considered riskier for lenders because these loans can’t be guaranteed by Fannie and Freddie, meaning the lender is not protected from losses if a borrower defaults. Jumbo loans are typically available with either a fixed interest rate or an adjustable rate, and they come with a variety of terms.

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Qualifying for a jumbo loan

Underwriting criteria for jumbo loans are stricter because the loans are larger and riskier for lenders.

Credit score

Lenders may require your FICO score to be higher than 700, and sometimes as high as 720, to qualify for a jumbo loan.

Debt-to-income ratio

Lenders will also consider your debt-to-income ratio (DTI) to ensure you don’t become over-leveraged, though they may be more flexible if you have plentiful cash reserves. Some lenders have a hard cap of 45% DTI, however.

Cash reserves

You’re more likely to be approved for a jumbo loan if you have ample cash in the bank. It’s not uncommon for lenders to ask jumbo loan borrowers to show they have enough cash reserves to cover one year of mortgage payments.

Documentation

To prove your financial health, you’ll need extensive documentation, perhaps more than for a conforming loan. You should be prepared to hand over your full tax returns, W-2s and 1099s when applying, in addition to bank statements and information on any investment accounts.

Appraisals

Some lenders may require a second appraisal of the home you’re planning to purchase.

Jumbo loans vs. conforming loans

The key difference between a jumbo mortgage and a conforming loan is the size of the loan. For a thorough look at the two, and the pros and cons of each, read about the differences between conforming and nonconforming loans.

Among the other factors that differentiate jumbo loans from conforming loans:

Heftier down payment

While low down payments are fairly common on conforming loans, jumbo loans are more likely to require a down payment of at least 20%, though some lenders may go as low as 10%.

Potentially higher interest rates

Jumbo mortgage rates may be slightly higher than those on conforming loans, depending on the lender and your financial situation. However, many lenders can offer jumbo loan rates that are competitive with rates on conforming loans — and some may even offer slightly lower rates depending on market conditions, so make sure to shop around.

Higher closing costs and fees

Because jumbo loans are bigger and there are some extra qualifying steps, expect higher costs at the closing table.

Loan limits

The loan limit for conforming loans varies by county because some real estate markets are much pricier than others. For 2020, the conforming loan limit for one-unit homes in most counties nationwide is $510,400. However, in “high-cost areas,” especially in the Northeast and on the West Coast, conforming loan limits are expanded to $765,600 — and even higher in a few other places.

Find local conforming loan limits

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