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Jumbo Loans: When a Regular Mortgage Isn’t Enough

Jumbo loans are mortgages too big to qualify for Freddie Mac and Fannie Mae backing. Lenders may charge steeper interest rates and require higher down payments and credit scores.
Finding the Right Mortgage, Mortgages
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If you’re shopping for an expensive home or searching in a hot real estate market, you may find that the amount you need to borrow exceeds the loan limits for traditional loans.

Your best option could be a jumbo loan, which allows you to borrow a larger sum of money for a property than a conforming loan. A conforming loan is a mortgage that “conforms” to Fannie Mae and Freddie Mac requirements regarding credit, debt and loan size.

Jumbo mortgages and conforming home loans have many similarities, but there are some key differences to be aware of, including the amount of down payment, cash reserves and credit score you’ll need to qualify.

» MORE: Best jumbo mortgage lenders of 2018

What is a jumbo loan?

A jumbo mortgage, or jumbo loan, is a home loan that’s bigger than the limits on conforming loans set by Fannie Mae and Freddie Mac. Also called non-conforming mortgages, jumbo loans are considered riskier for lenders because these loans aren’t 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. You may need a jumbo loan if the amount you need to borrow is over the federal conforming loan limits in your county. Use the tool below to see conforming loan limits across the U.S.

» MORE: Jumbo loan threshold climbs even higher

Qualifying for a jumbo loan

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

CREDIT SCORE

Most lenders require your FICO score to be higher than 700, and sometimes as high as 720, if you’re in the market for a jumbo loan, says Jim Sahnger, a mortgage broker with Schaffer Mortgage Corp. in Palm Beach Gardens, Florida. He observes some lenders go as low as 680, but that’s usually the minimum.

» MORE: Check your credit score for free

DEBT-TO-INCOME RATIO

Your debt-to-income ratio is also considered to ensure you don’t become over-leveraged, though lenders tend to be somewhat flexible when considering this factor, Sahnger says, especially if you have plentiful cash reserves. However, some lenders have a hard cap of 45%, he says.

CASH RESERVES

You’re more likely to be approved for a jumbo loan if you have enough cash in the bank. Eric Gotsch, area sales manager for Wells Fargo Home Mortgage, says jumbo loan borrowers may need 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, Gotsch says.

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 this article about the differences between conforming and nonconforming loans.

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

HEFTIER DOWN PAYMENT

While it’s fairly common to put down less than 20% on conforming loans, jumbo loans are more likely to require a down payment of at least 20%. The minimum down payment for a jumbo mortgage is 10% for most lenders, Sahnger says. SoFi is one such lender. For jumbo loans up to $1 million, Wells Fargo permits down payments of 10.1% with no private mortgage insurance, Gotsch says. Other lenders, such as U.S. Bank, require at least 20% down.

POTENTIALLY HIGHER INTEREST RATES

Jumbo mortgage rates may be slightly higher than those on conforming loans, depending on the lender. 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

The loan is bigger and there are some extra qualifying steps, which means higher costs at the closing table.

» MORE: Calculate your monthly mortgage payment

Loan limits

The loan limit for conforming loans varies by county because some real estate markets are much pricier than others. For 2018, the conforming loan limit for one-unit homes in most counties nationwide is $453,100. However, in “high-cost areas,” especially in the Northeast and on the West Coast, conforming loan limits are expanded to $679,650 — and even higher in a few other places.