What Is A Jumbo Loan And How Does It Work?

A jumbo loan is a nonconforming mortgage loan that exceeds the Federal Housing Finance Agency (FHFA) maximum limit. For 2023, the maximum limit for a conforming loan is $726,200 in most states, but can be as high as 150% more, or $1,089,300, in counties and territories with high costs of living. 

Fannie Mae and Freddie Mac do not guarantee, purchase, or secure jumbo mortgages. There are more strict guidelines to qualify for a jumbo loan, which is primarily used to finance high-value properties and homes in highly competitive markets. 

How does a jumbo loan work?

A jumbo loan works similar to a traditional mortgage, but with more stringent credit requirements compared to a conventional loan. Jumbo lenders still must comply with qualified mortgage guidelines set by the Consumer Financial Protection Bureau (CFPB), however.

Borrowers should have a debt-to-income (DTI) ratio of 43% or lower. Some lenders prefer a DTI around 36%, which can give you more loan options and better terms. While conventional lenders want to see at least a 620 credit score, most jumbo lenders expect a credit score of 700 or higher.

With a larger loan amount comes a bigger monthly mortgage payment and more scrutiny by lenders to ensure you can cover the mortgage. Expect to provide at least two years of W-2s and tax returns, plus recent bank and investment statements. 

To qualify, the borrower should be able to provide proof of cash reserves or liquid assets to pay for up to a year's worth of mortgage payments. Lenders also want to see any non-liquid asset ownership, which can include other real estate properties. 

Though down payment requirements can vary, jumbo lenders typically ask for 10% to 15% down payment, but some may expect you to put down 20% or more. If you put down less than 20%, you’ll have the added cost of private mortgage insurance (PMI) included in the monthly mortgage payment.

Jumbo loan pros & cons

If you’re looking to buy a high-value home, you might consider a jumbo loan. Before you start the process, consider the pros and cons of taking out a jumbo mortgage.

Pros

• Higher financing option: If you’re looking at high-value properties, you could end up having to take out multiple conventional loans to finance your dream home. A jumbo loan is a single option with higher loan amounts than a conventional loan.
• Competitive interest rates: Although lenders take on more risk with higher loan values, interest rates for jumbo mortgages are generally on par with conventional loans and could be even lower for the right borrower. Lenders usually service jumbo loans in-house, which makes them compete more with other jumbo lenders for your business, keeping interest rates lower.
• Flexible loan options: Without restrictions from Fannie Mae, Freddie Mac, and wholesalers, jumbo lenders can be more flexible with their offerings. Borrowers may be able to choose from 15- to 30-year fixed-rate mortgages or 3- to 10-year adjustable-rate mortgages.

Cons

• Cash reserve requirement: Since jumbo loans put lenders at more risk with substantial lending amounts, they often require borrowers to provide proof of cash reserves prior to closing. Lenders may require up to 12-months of mortgage payments set aside in an account to ensure you can pay the mortgage.
• Excellent credit: Conventional lenders typically want to see credit scores of 620 or higher, though some have more relaxed guidelines. Expect lenders to require a minimum of a 700 credit score or even higher to qualify for a jumbo mortgage loan.
• More scrutiny for approval: Lenders want to ensure they’re making a sound financial investment, so jumbo loan borrowers face more scrutiny. Besides proof of high income, lenders can have stricter property requirements like no short sales, foreclosures, or vacation homes.
• Tax implications: Borrowers who itemize their tax returns can only deduct the interest on mortgage debt up to $750,000, which leaves many jumbo borrowers with less of a deduction. Local and state tax deductions are also capped at $10,000 per year, which may make jumbo loans more costly than conventional loans.

What are jumbo loan limits?

Unlike conforming loans, jumbo loans do not have federal loan limits. Jumbo loan limits vary by lender, but can be several million dollars for a single-unit property. 

Conforming loan limits are up $79,000 from 2022, making the limit for one-unit properties $726,200 for 2023. In Alaska, Guam, Hawaii, Puerto Rico, and the U.S. Virgin Islands, the limit is up to 150% above baseline, or a maximum of $1,089,300. 

Some counties in the following states also have higher conforming loan limits:

• California.
• Colorado.
• District of Columbia.
• Florida.
• Idaho.
• Maryland.
• Massachusetts.
• New Hampshire.
• New Jersey.
• New York.
• Pennsylvania.
• Tennessee.
• Utah.
• Virginia.
• Washington. 
• West Virginia.
• Wyoming.

Since lenders set their own nonconforming jumbo loan limits, it’s in your best interest to shop lenders to compare rates and terms. 

How to qualify for a jumbo loan

Though jumbo loan requirements can vary by lender, expect to need more money in the bank, a higher income, and a better credit score than you need to be eligible for a conventional loan. Since jumbo loans are riskier for lenders, underwriting is more strict.

To qualify for a jumbo mortgage, most lenders require:

• Credit score of 700 or higher.
• Down payment from 10% to 20% or higher.
• Higher fees and closing costs due to larger loan size.
• The potential for a second appraisal to confirm value is in line with the purchase price.
• Cash reserves of 6 to12 months.
• DTI of 45% or lower.

Chase, for instance, requires 30 days of recent pay stubs and 60 days of recent bank statements, plus two years of W-2s and tax returns. If you own a business or are self-employed, expect to provide  a balance sheet and profit-and-loss statement. 

Chase offers some flexibility for jumbo loan borrowers. If, for example, you have a low DTI, you might get away with a below-700 credit score. Or if you have a high DTI but substantial cash reserves or an excellent credit score, you might still qualify.

Ally will finance investment properties, vacation, and primary homes with a jumbo loan. They also offer down payments as low as 10.01%. There are no lender fees and the application can take just 15 minutes online if you have everything ready to go when you apply. What’s more, you can track the entire process on your phone or computer. Ally also offers custom loans and rates for qualified borrowers financing up to $4 million. 

When should you get a jumbo loan?

A jumbo loan is an option borrowers should consider if they’re buying a high-value home. Jumbo mortgages are best for a specific subset of the population some call HENRYs, short for “high earners, not rich yet.” They are mostly those making between $250,000 and $500,000 per year.

These individuals typically have higher credit scores and more substantial cash reserves and investments than lower-income earners. They don’t have millions of dollars in assets, but could in the future, making them an excellent candidate for wealth management services, which many lenders offer.

However, consider that jumbo loans can have higher interest rates and lenders usually have more strict underwriting guidelines. Having more than $750,000 in mortgage debt also has tax implications, as there are restrictions on how much mortgage interest you can deduct when itemizing.

Frequently asked questions (FAQs) 

Can I get a jumbo loan refinance?     

Yes, you can get a jumbo loan refinance with many lenders offering jumbo mortgages. Jumbo lenders have strict underwriting criteria to qualify, such as a good credit score, large cash reserves and a lower DTI ratio than required for a conventional loan refinance. Qualification standards vary by lender; shopping around can help you find the best jumbo loan refinance terms and interest rates.

What is the difference between a jumbo loan and a regular loan?

The major differences between a jumbo loan and a regular loan are the size of the loan and the underwriting guidelines. Regular loans aren’t as risky for lenders, so they typically have more flexible requirements, such as lower credit scores, higher DTI ratios, smaller cash reserves, and lower down payments. Since jumbo loans carry more risk for lenders and aren’t government-insured, lenders typically require higher credit scores, larger cash reserves, and down payments with a lower DTI ratio.

Does applying for a jumbo loan affect your credit score?

Yes. Just like a conventional loan, going after a jumbo loan can affect your credit score. When you apply, lenders will check your credit report and score, which is a hard inquiry on your credit. A hard pull can drop your credit score a few points temporarily and stay on your report for up to two years. Paying your jumbo mortgage loan on time can help improve your credit score.