Jumbo loans allow you to borrow for expensive properties. While “conforming” loans limit how much you can borrow, jumbo mortgages are typically available for several million dollars.
In the United States, the vast majority of residential property mortgage needs can be met within the guidelines set up by government sponsored financing entities designed to encourage home ownership through the Federal Housing Finance Agency (FHFA).
Loans that conform to those rigid standards are called "conforming loans." It's an important concept, because if hundreds, or even thousands, of similar mortgages are created with nearly identical guidelines, they can more easily be bundled together to create "pools" of mortgages, which can then be securitized to create mortgage backed securities. This process is designed to provide greater liquidity to the mortgage market.
But if the property is too expensive to meet those guidelines, they may still be attractive loans for lending institutions to make. They just don't "conform" to the limits of government programs and must be securitized privately: usually at slightly higher interest rates. These bigger-than-standard mortgage loans are referred to as "jumbo loans."
Limits for Jumbo Loans
FHFA sets dollar limits on loans for Fannie Mae (FNMA) and Freddie Mac (FHLMC). Those government-sponsored entities handle a significant share of mortgage loans in the U.S., and they keep the money flowing by selling mortgages to investors. As a result, it’s easiest to borrow when your loan fits their guidelines.
Conforming limits: Loan limits depend on where you live, but for the vast majority of counties in the U.S., the maximum loan amount for FNMA and FHLMC is $510,400 in 2020 and $548,250 in 2021. However, in high-cost areas, you can borrow more. For most high-cost areas in the U.S., the maximum loan limit for FNMA and FHLMC is 150% of the regular maximum amount: $765,600 in 2020 and $822,375 in 2021.
Jumbo loan limits: If you don't live in a high-cost area and want to borrow more than $548,250, you typically need a jumbo loan. Banks, mortgage lenders, and other investors can lend as much as they’re comfortable with, and they set their own maximum limits for jumbo loans. For example, some banks lend up to $5 million, while others have different limits.
Can You Qualify?
Although jumbo loans allow for significant loans, qualifying for funding can be a challenge. As the dollar amounts grow, lenders take on greater risks, and they’re more careful about approving loans. Jumbo loans typically require:
- A significant down payment—20% or more is best, but you might be able to borrow with less
- High credit scores, with a lack of negative items in your credit history—a FICO score of 700 or higher is ideal
- Substantial reserve assets—enough to cover six months of payments is a minimum
- Sufficient income to comfortably support monthly payments—a 43% debt-to-income ratio is a good starting point
That said, every situation is unique, especially with jumbo loans. Ask a lender what criteria determine whether you can get approved. In some cases, you can still qualify even if one of the factors above isn’t perfect—strength in other areas can make up for any issues. For example, if you have a blemish in your credit reports, a sizeable down payment might help you qualify.
Should You Go Jumbo?
Jumbo loans allow you to buy luxury homes, unique properties, and “normal” houses in expensive areas. But just because you can get a big loan doesn’t mean you should. Larger loans mean substantial interest charges, and it’s critical to understand how much you’re paying for a property after you account for interest costs.
In some cases, it may be wise to make a bigger down payment (to borrow less) or buy a less-expensive property.
Other Loans With Jumbo Limits
Jumbo loans aren’t your only option. Especially if you’re having trouble qualifying for a jumbo mortgage, it’s worth investigating programs from federal and local governments as well as nonprofit organizations.
Relatively easy to qualify for, FHA loans allow for a down payment as low as 3.5 percent. They have the same loan limits as conforming loans, but those loans are sensitive to the county you’re buying in.
These loans allow service members and their families to borrow with no down payment. That approach has pros and cons: You don’t need significant cash savings to buy, but having zero equity is risky, and the more you borrow, the more interest you pay. Again, the limits are the same as other FHFA loans.
Grants and Down Payment Assistance
Down payment assistance can also help to reduce the amount you borrow. Those funds come from a variety of sources, and they require some research and legwork on your part—different programs are targeted to specific borrowers. Several ways to find assistance include:
- Ask a mortgage lender or real estate agent about programs available in your area.
- The U.S. Department of Housing and Urban Development (HUD) maintains a directory of homebuyer programs.
- Local nonprofit organizations may know of first-time homebuyer loans and other resources available.