What Is a Jumbo Loan?

Jumbo mortgages

The Balance / Adrian Mangel

DEFINITION
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.

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.

Learn more about these large loans, who they are designed for, and how to decide if you need one.

Definition and Examples of Jumbo Loans

Jumbo loans get their name from the large loan balances available. Conforming loans for 2022 are capped at $647,200 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 2022 limit is $970,800 (the one-unit baseline of $647,200 multiplied by 150% since it is a high-cost area).

Tip

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.

How Do Jumbo Loans Work?

Banks and other private investors issue jumbo loans. Those lenders typically do not sell jumbo loans to GSEs, so they can design their own approval criteria. Every lender has unique goals and concerns, so every jumbo loan program is unique. 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, one lender might make getting a loan for second homes easier, while another has a higher down payment requirement.

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 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, high and steady 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. 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 of 80% or lower

Important

Jumbo loans are not designed to help borrowers “stretch” and buy more home than they can afford. Instead, they’re for financially secure borrowers who are buying homes that are more expensive than average.

How Much Does a Jumbo Loan Cost?

Jumbo loans, since they are larger loans, come with much higher monthly payments since they are compressed into the same terms as smaller loans. However, the costs are much higher when you consider interest, closing costs, and mortgage insurance are all based on percentages.

Interest Charges

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 for lenders. However, jumbo loan rates are currently similar to conventional loan rates, and you might even find a jumbo mortgage with a lower rate or be able to choose between fixed and variable rates. Regardless, you'll still pay significantly more in interest using a jumbo loan.

For instance, suppose two homeowners have the same interest rate of 3.78% on 30-year mortgages. One homeowner has a $200,000 mortgage, and the other has one for $1.2 million. Over the life of their mortgages, the one with the $200,000 mortgage will pay more than $108,000 in interest, while the one with a $1.2 million mortgage will pay more than $800,000 in interest.

Closing Costs

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. Closing costs tend to range between 2% and 5% of the home's value—the loan of $1.2 million would have much higher closing costs than the smaller loan.

Generally, the buyer pays closing costs, but you might be able to negotiate with the seller to get some help paying them, depending on market conditions.

Mortgage Insurance

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 approach to buying a luxury home or property 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.

Piggyback Loans

Instead of one large loan, you can use a combination of smaller loans. There are a few different ways lenders can break down the loans:

  • 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. You'll generally need high credit scores to be approved, but you might qualify with FICO scores in the high 600s if you meet other criteria.

Additionally, 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.

Be aware that some piggyback arrangements use balloon loans. For example, you might need to pay off one or both loans or refinance within 15 years.

Do I Need a Jumbo Loan?

While there are good reasons to get a jumbo loan, there are some factors you might consider before trying to secure one.

Verify Limits

Before deciding on a jumbo mortgage, verify that you 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 a better option than paying interest on a large loan.

Key Takeaways

  • Jumbo loans are home loans that exceed the conforming loan amounts defined by the Federal Housing Finance Agency.
  • Because jumbo loans are large loans for expensive properties, the costs are also proportionately higher.
  • 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.

Article Sources

  1. Federal Housing Finance Agency. "FHFA Announces Conforming Loan Limits for 2022." Accessed Jan. 9, 2022.

  2. Federal Housing Finance Agency. "Conforming Loan Limits Map." Accessed Jan. 9, 2022.

  3. Quicken Loans. "Jumbo Loan: Definition, Rates, and Limits." Accessed Jan. 9, 2022.

  4. J.P. Morgan Chase Bank. "Jumbo vs. Conventional Loans." Accessed Jan. 9, 2022.