Jumbo loans are a type of mortgage product designed for higher-priced homes. They’re typically reserved for buyers with good credit, steady income, and a good amount of cash reserves.
What is a jumbo loan?
A jumbo loan is a mortgage that has a balance higher than the conforming loan limit for the county you’re buying or refinancing in. In most places, the conforming loan limit is $647,200, though, in some higher-cost markets, it goes up to $970,800.
Fannie Mae and Freddie Mac will only purchase mortgage loans that fall under the conforming loan limit. Because Fannie and Freddie’s willingness to buy conforming loans lowers the risk for lenders, conforming loans are usually easier to qualify for.
Non-conforming loans (or jumbo loans) on the other hand, require a higher credit score, bigger down payment, and more in cash reserves due to the added risk they carry.
Tip:
In most cases, jumbo loans are best reserved for buyers in strong financial standing or who earn a high income. But depending on where you’re buying a home, a jumbo loan might be the only option due to high home prices.
Find Out: How Much Does It Cost to Buy a Home?
Conforming loans vs. jumbo loans
One of the main differences between conforming loans and jumbo loans is that jumbo loans can be more difficult to qualify for.
Additionally, while qualifying requirements for conforming loans are less variable across lenders (they have to be for Fannie and Freddie to buy the loans), lenders have more leeway with jumbo loans. For these reasons, qualifying requirements can vary greatly from one mortgage lender to the next.
Here’s a quick look at some key differences between conforming loans and jumbo loans:
More to consider: Jumbo loan borrowers have an average credit score that’s 26 points higher than conforming loan borrowers, according to data from CoreLogic.
They also have lower loan-to-value ratios (by 6 percentage points) and lower DTIs (by 3 percentage points).
Find out: Should You Buy a Bigger House? How to Make the Right Choice
How to qualify for a jumbo loan
Because Fannie and Freddie do not set the requirements for jumbo loans, lenders have some leeway with their eligibility standards. That being said, they’re typically more difficult to qualify for due to the heightened risk they come with.
Here’s a look at the typical requirements you can expect with a jumbo loan, though they vary from lender to lender:
- Credit score: 680 or higher
- Max debt-to-income ratio: 38% to 43%
- Min. down payment: Typically between 10% to 30%
- Documents needed: Might require additional income documentation and tax returns (especially for self-employed borrowers)
- Cash reserves: 6 to 18 months of mortgage payments
- Appraisals: Might require a second appraisal
Because jumbo loan standards vary by lender, they have to be manually underwritten, which can sometimes make the loan process more complicated.
You can expect a little more back-and-forth with your loan officer (and usually more documentation) when getting a jumbo loan.
Jumbo loan requirements for each loan type
Some lenders break down their requirements by loan type, so you’ll need to meet different standards if you’re buying a home, refinancing, buying an investment property, or doing a cash-out refinance.
Jumbo loan requirements can vary greatly depending on the lender you choose. Here are some typical examples of the requirements for each type:
Home purchase
- Min. down payment: 10% for homes under $1.5 million; up to 40% for homes over $1.5 million (possibly higher for first-time homebuyers)
- Min. credit score: 680 to 720 depending on your down payment
- Max DTI: 40%
Refinance
- Equity required: 20% for homes under $1.5 million; up to 40% for homes over $1.5 million
- Min. credit score: 680
- Max DTI: 43%
Cash-out refinance
- Equity required: 20% to 30%
- Cash available: $350,000 to $750,000, depending on your equity stake
- Loan limits: $1 to $2 million, depending on your equity stake
Investment properties
- Min. down payment: 40%
- Loan limits: $1 million
- Min. credit score: 720 to 760
- Max DTI: 43%
Jumbo loan rates
Jumbo loans come with more risk than conforming loans. For one, they’re not guaranteed by Fannie Mae and Freddie Mac, which means the lender can’t sell the loan to Fannie or Freddie later on.
On top of this, the balance is also higher than a conforming mortgage, which means more financial loss for lenders if you fall behind on payments.
To compensate for these added risks, lenders will sometimes charge higher interest rates to jumbo loan borrowers. However, you might be able to find competitive jumbo loan rates as long as you shop around.
Learn More: How to Get the Best Mortgage Rates
How to know if a jumbo loan is right for you
Jumbo loans are designed for higher-priced properties. They come with more stringent qualifying requirements, which could sometimes mean higher monthly payments and higher interest rates. Because of this, they’re best reserved for buyers with good credit, consistent income, and lower levels of debt.
If you do decide a jumbo loan is right for you, you must shop around for your lender. Jumbo loan standards vary widely, and shopping around can help you get the best rate, lowest closing costs, and most appropriate mortgage for your needs.
