A jumbo loan (also called a "non-conforming loan") is a home loan that is larger than “conforming” loans that lenders sell to Fannie Mae and Freddie Mac. Unlike loans that follow standard maximum limits set by government-sponsored entities (GSEs), jumbo loans can be substantially bigger. Those lenders have their own rules for approval and often hold the loans as investments.
Most importantly for home buyers, jumbo loans make it possible to buy more expensive homes. You might not care about mortgage loan markets, but if you’re buying a high-priced home and don’t make a sizeable down payment, you might need a jumbo loan. You could even get a better interest rate with a non-conforming loan.
- Jumbo loans are mortgages that exceed the loan limits for the area you live in.
- These loans are designed for people with higher incomes or who are more financially stable.
- To qualify, you'll need to have a significant amount of savings or assets, outstanding credit, and a low debt to income ratio.
Why Large Loan Balances Are Called "Jumbo-Sized" Mortgages
Jumbo loans get their name from the large loan balances available. Conforming loans for 2021 are capped at $548,250 in most parts of the country and have additional rules on borrower qualifications. In some high-cost areas, loan limits go much higher to account for local housing markets. For example, in Los Angeles County, the 2021 limit is $822,375 (the one-unit baseline of $548,250 multiplied by 150%, since it is a high cost area).
If you want to borrow more than the loan limit in your area, you’ll need to use a jumbo loan or find another creative method to secure financing.
Jumbo Lenders Have Individual Goals
Banks and other private investors issue jumbo loans. Those lenders typically do not sell jumbo loans to GSEs, so lenders can design their own approval criteria. Every lender has unique goals and concerns, so every jumbo loan program is uniquw. Because of that, it’s smart to shop among various lenders, as you may find different pricing and approval criteria.
Find a lender that fits your financial situation and the property you’re buying. For example, some lenders make it easier or harder to get loans for second homes, and different lenders have different down payment requirements.
Qualifying for Jumbo Mortgages
As with any loan, you need to meet the approval criteria. Jumbo loans are more difficult to qualify for than conventional loans. The loan amounts are higher, so lenders are understandably more selective, given the increased risk of issuing jumbos.
- Credit History: You need good credit to get approved for a jumbo loan. A FICO score of 700 will most likely be required, but other factors could warrant a slightly lower score.
- Down Payment: Jumbo mortgages typically require down payments of 20% or more. However, some mainstream jumbo lenders will work with down payments of around 10%. You might even see advertisements with even lower requirements. To qualify for a jumbo loan with a small down payment, you’ll need good credit, strong income, or significant reserve assets.
- Income and Assets: For these large loans, lenders require documentation to prove that you have sufficient income and assets to afford the property you’re buying. A consistent income is best. Self-employed individuals need tax documents and additional information about their businesses, and wage-earners need W2 forms. Lenders also like to see reserve assets available to cover payments for six to 12 months.
- Debt-to-Income Ratio: A low debt-to-income ratio is always helpful when applying for loans. Lenders might use 43% as a target, but that number is not set in stone. Especially if you have significant assets available, lenders might consider those assets (or the earnings from those assets) in your income calculation.
Every lender will have different qualification criteria. For instance, J.P. Morgan Chase Bank requires:
- An excellent or exceptional credit score (FICO 800-850, Vantage 781-850)
- Some form of reserves
- A minimum 20% down payment
- Enough income to repay the loan
- A debt-to-income ratio of 43% or lower
- A loan-to-value ratio 80% or lower
Jumbo loans are not designed to help borrowers “stretch” and buy more house than they can afford. Instead, they’re for financially secure borrowers buying homes that are more expensive than average.
What You Pay for a Jumbo Loan
Historically, jumbo loans featured higher interest rates than conforming loans. That makes sense when you consider the bigger risk. Plus, approving one-off borrowers who don’t fit into tidy categories is labor-intensive. Now, jumbo loan rates are similar to conventional loan rates, and you might even get a lower rate on a jumbo mortgage.
Jumbo loans feature closing costs, just like any other home loan. However, appraisal fees may be higher than average due to specialized properties or high-dollar purchases. In some cases, you’ll need two appraisals for jumbo loan approval.
Mortgage insurance protects lenders when borrowers default on a loan. Conforming loans and government programs typically require borrowers to buy this insurance when making a small down payment, because they might not recover all of their funds in a foreclosure.
But jumbo loans are different. Whether or not you need to pay private mortgage insurance (PMI) on a non-conforming loan is up to the lender—some might allow for less than 20% down with no PMI.
Alternatives to Jumbo Loans
Jumbo loans aren’t the only avenue to buying luxury homes or properties in hot real estate markets. If you’re not eager to take on a substantial amount of debt, or if you’re having trouble getting approved for a jumbo loan, a different approach may be better.
Instead of one large loan, you can use a combination of smaller loans. There are a few different ways the loans can be broken down:
- 80/20 Loan: With an 80/20 piggyback loan, you’ll get a “first” mortgage for 80% of the property’s purchase price. Because you have an 80% loan-to-value (LTV) ratio, you avoid paying PMI. The second mortgage covers the remaining 20% of the purchase price.
- 80/10/10: With an 80/10/10 approach, you also get the first loan at 80% LTV. Then, you make a 10% down payment, leaving only 10% left to borrow on a second mortgage.
Piggyback loans solve the problem of paying PMI, but you’re still borrowing large sums of money. To get approved, you need high credit scores—but you might qualify with FICO scores in the high 600s. In addition, interest rates on second mortgages tend to be higher than rates on first mortgages, so your borrowing costs may be higher with this strategy. Compare those costs with other options using a loan calculator or an amortization table.
Final Thoughts on Jumbo Loans
While there are good reasons to get a jumbo loan, there are some factors you might consider before trying to secure one.
Before you decide on a jumbo mortgage, verify that you actually need one. Jumbo loans aren’t necessarily bad—again, rates may be comparable to other loans. But conforming loans or government programs might be a better fit for you.
If you’re in a high-cost area, you can often borrow more than the “standard” limit. Some people use the term “jumbo” to refer to conforming loans in those high-cost areas, so ask for clarification when discussing your options.
Larger Down Payment
One simple way to avoid using a jumbo mortgage is to make a bigger down payment. You only need to come up with enough money to keep the loan balance below your local conforming loan limit.
With that approach, you have more options available, and you will pay less interest on a smaller loan balance. Raising a significant amount of cash is more easily said than done—but if you have the funds available, it may be an attractive option.