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What Is a Jumbo Loan and How Do You Qualify for One?
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If you’re on the hunt for a luxury home — or live in a high-cost area — you’re probably in jumbo loan territory and in need of financing that exceeds conforming loan limits. But before you apply, it’s important to understand what a jumbo loan is and how it stacks up against a conventional loan.
What is a jumbo loan?
A jumbo loan is a type of conventional loan that doesn’t meet lending guidelines established by Fannie Mae and Freddie Mac, the two government-backed entities that buy and sell loans from private mortgage lenders.
Also called a “non-conforming loan,” jumbo loans have balances that exceed conforming loan limits. In 2021, single-family mortgages with balances higher than $548,250 in most U.S. counties (and $822,375 in high-cost areas) are considered jumbo.
Fannie Mae and Freddie Mac don’t purchase jumbo mortgages because of their high loan limits. These loans may have a balance of up to $1 million or $2 million, according to the Consumer Financial Protection Bureau (CFPB).
Understanding jumbo loan requirements
Jumbo loan requirements tend to be more stringent than those for conforming loans, said Jerry Koors, president of Merchants Mortgage. What’s more, the criteria can change depending on the loan amount, he added.
“For example, it’s pretty rare to find an investor that will do a jumbo loan over 80% loan-to-value if the loan amount is over $1 million,” Koors explained.
Before the ongoing coronavirus pandemic, you could find a jumbo lender with a maximum 90% loan-to-value requirement, said Ray Rodriguez, a regional mortgage sales manager at TD Bank.
Your loan-to value (LTV) ratio calculates how much you’re borrowing as a percentage of your home’s value. If you’re getting a $600,000 loan on a home that costs $750,000, your LTV ratio is 80%, which means you’d need to bring 20% of the home’s purchase price to the closing table.
Jumbo vs. conforming loan
That jumbo loan amounts are higher than conforming loan amounts isn’t the only characteristic that sets them apart.
For one, you’ll need a good credit score. Conforming lenders have a 620 minimum; jumbo lenders typically want to see a minimum credit score of 700.
Jumbo loans are typically manually underwritten, meaning a loan underwriter physically reviews each mortgage application and decides on approval or denial. This differs from conventional loans, which are often processed through an automated underwriting system.
You can expect to pay more for a jumbo home loan, too. Rates are anywhere from 12.5 to 37.5 basis points higher than conventional mortgage rates, according to lending experts.
For example, if you’re quoted a 2.75% rate for a 30-year fixed-rate conforming loan, a jumbo loan rate could range from 2.875% to 3.125%. Prior to the COVID-19 outbreak, Rodriguez said, jumbo rates were lower than conforming loan rates.
You’ll also need a significantly larger down payment. As discussed above, lenders often require 20% down for a jumbo mortgage. By contrast, it’s possible to qualify for a conforming loan with a minimum 3% down payment.
Pros and cons of a jumbo mortgage
| You can get a fixed mortgage interest rate.
You can borrow above the conforming loan limit.
You avoid private mortgage insurance (PMI) (with a 20% down payment).
| You’ll typically need at least a 20% down payment.
You may have a higher mortgage rate than a conforming loan.
You may have fewer federal protections than a conforming loan.