What is a Jumbo Loan and When Do You Need One?

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Jumbo houses need jumbo loans.

When you buy a new property, you may need a mortgage to finance the purchase. The federal government sets limits on how much you can borrow, and while the average property fits into this bracket with no problem, what happens when you want to take out a loan larger than the limits allow?

A jumbo mortgage can give you the larger funds traditional loans do not cover — provided that you can find a lender that offers one, meet the qualifications, and afford the higher cost.

Where do you go to finance such a large amount? Here’s what you need to know. 

What is a Jumbo Mortgage?

A jumbo loan is designed for expensive, higher-end properties that exceed the loan limits of a conventional loan. The conforming loan limit is set each year by the Federal Housing Finance Agency (FHFA), with most of the U.S. limited to $548,250 for the conventional home loan. When you exceed these amounts, you are now entering jumbo mortgage territory.

Once the price tag reaches certain heights, you do not qualify for the standard protections from Fannie Mae or Freddie Mac that would normally secure your loan. This is why a jumbo mortgage is also known as a non-conforming loan and can be available as either a fixed-rate or adjustable-rate loan.  

Why Use a Jumbo Mortgage? 

If you want to buy a house that’s more expensive than normal, a jumbo loan can help you get the financing you need. Jumbo loans aren’t just used to buy a primary residence; this type of loan is also a popular choice for investment properties and vacation homes. 

“Housing is a great investment. In general, the people getting jumbo loans are the most creditworthy, and the money being leveraged is being put back into their businesses,” says John Lynch, the CEO of PCMA, a financial services firm that provides non-bank private client lending. Lynch cautiously recommends a jumbo mortgage to aspiring investors.

“Even for jumbo loans, rates are still very low, and if you are able to find the right lender, it may make sense to purchase a home with a jumbo loan today,” says Eric Jeanette, owner of Dream Home Financing and FHA Lenders in New Jersey.  

Jumbo Loans vs. Conforming Loans

A jumbo loan and a conventional mortgage serve the same purpose — to provide financing for a house. The main differences are the loan amounts and the borrower requirements. 

Jumbo loans, as the name implies, offer a significantly larger loan value. Of course, a higher loan value means more risk for the lender, so they need to be stricter on who they lend to. You’ll typically find higher credit scores and down payment requirements on a jumbo loan compared to a conventional mortgage. And since fewer lenders are willing to lend such large amounts, you may have slimmer pickings when it comes to finding a lender to work with. Jumbo loans also tend to have higher closing costs and interest rates. Even though the interest rates are relatively low across the board, jumbo loan rates are still higher than those of a traditional home loan.

Jumbo Loan Rates

These are the current jumbo loan rates:

ProductInterest RateAPR
30 Year Jumbo3.1703.270
15 Year Jumbo2.4502.520
5/1 ARM Jumbo2.9503.600
7/1 ARM Jumbo3.0903.660

How to Qualify for a Jumbo Loan Mortgage

Not everyone that wants a jumbo loan can get one. 

Jumbo mortgages are difficult to procure because not every lender offers them. The bigger the loan, the longer it takes to pay off, and the extended timeline presents more risk than most lenders allow. It is still possible to get a jumbo loan, but your interest rates will be higher than the traditional home mortgage, and it could be extremely difficult even to qualify. 

Lynch gives us an exclusive inside look at PCMA’s average client for a jumbo mortgage.

  • Loan Amount: $1,004,302.89
  • Loan-to-value ratio (LTV): 61.24
  • FICO Score: 740
  • Borrower Age: 61
  • Co-Borrower Age: 59
  • Years in Home: 16

Lenders look for a higher credit score for jumbo loans than they do for a conventional mortgage. Your debt-to-income ratio is also important, and lenders tend to prefer anywhere from 43% to as low as 36%.   

The higher loan amount of a jumbo mortgage can make some banks uneasy, so to quell anxious nerves, they may ask for proof of reserve funds, such as savings or jewelry. This can go a long way in proving to a lender you are capable of repaying your loan.

The down payment is larger, too. Many lenders will accept as little as 3% for an average home loan, even though personal finance experts typically recommend aiming for 20%. On jumbo mortgages, lenders will look for anywhere from 15% to 30% down on loans. Additional appraisals may also be required. 

Jumbo Loan Limits

Conforming loan limits — sometimes known as jumbo loan limits — are set by the Federal Housing Finance Agency (FHFA) every year and vary based on location. Certain high-cost areas may have higher loan limits than the baseline limit. Anything below these limits is considered a conforming loan, while anything above these limits is considered a jumbo loan.

Here are the conforming loan limits for one-unit properties in 2021:

  • $548,250 in most of the U.S.
  • $822,375 in most high-cost areas
  • $822,375 in Alaska, Hawaii, Guam, and the U.S. Virgin Islands

You can find the exact conforming loan limits for your county using the FHFA’s conforming loan limits interactive map

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