A jumbo mortgage is just what the name implies: It’s a big - very big - loan amount. It’s a nonconforming conventional loan, one that's not backed by the Federal Housing Administration (FHA) or the U.S. Department of Veterans Affairs (VA). Fannie Mae and Freddie Mac don’t want anything to do with these loans because of their size. They surpass certain dollar limits set by the Federal Housing Finance Agency or FHFA.
Jumbo mortgages are similar to conforming loans – those that fall under these dollar limits – with regard to terms for the mortgage loan, but they can be more difficult for home buyers to qualify for, for obvious reasons. A lot of money is at stake.
What Is a Jumbo Mortgage?
Fannie Mae and Freddie Mac purchase home loans, then they package them and sell them to investors. They’re government-backed, overseen by the Federal Housing Finance Agency. The FHFA sets dollar limits annually to draw a firm line between loans that Fannie Mae and Freddie Mac will buy – conforming loans – and loans they won’t.
A mortgage is said to be jumbo if it’s larger than these conforming loan limits. The cap for 2021 is $548,250. That’s a lot of mortgage, and lenders are understandably cautious about venturing into these waters without the backing of Fannie Mae and Freddie Mac. Jumbo loans involve borrowing more than this amount. But other than their size, they’re really not much different from conforming loans. Terms, payment schedules, and the types of interest rates available are similar.
The $548,250 only applies to single-family dwellings. Multi-unit properties have their own Fannie Mae and Freddie Mac limits. But this isn’t to say that jumbo mortgages can only be used to purchase private, primary residences. You can also use the proceeds to buy a vacation home or investment property.
Read More: What Are Fannie Mae and Freddie Mac?
FHFA Maximums Vary by Location
That $548,250 isn’t quite carved in stone. The figure is higher in Hawaii, Alaska, Guam, Puerto Rico and the U.S. Virgin Islands, to meet the needs of those real estate markets. It’s $822,375 in these areas as of 2021. This limit can apply in high-cost areas as well, such as parts of New York and California and the District of Columbia where real estate sells at a premium.
It’s not a given that you’d have to take out a jumbo mortgage if you want to borrow a bit more than $548,250, depending on where you're looking to buy a home. This might be the case in average suburbia, but not in big-dollar metropolitan areas.
Qualifying: Your Credit Score
Needless to say, the credit score requirements for qualifying for a jumbo loan can be a bit of a challenge. First, there’s the matter of your credit score. It will most likely have to be upward of 700, probably in the neighborhood of at least 740, before a lender will consider giving you so much money. You can often get a smaller, conforming conventional loan with a score of about 620, and FHA loans may allow an even lower score.
You might have some leeway, however, if you can show that you have a high, healthy income. This can offset a lower credit score, at least to some extent.
Read More: What Is Considered an Excellent Credit Score & How to Get One
The Amount of Your Down Payment
For a jumbo loan, you most likely need a somewhat significant down payment as well, as much as 25 to 30 percent instead of the 20 percent normally preferred by lenders for conforming loans. Remember, they don’t have Fannie Mae and Freddie Mac waiting in the wings and offering some measure of security with these jumbo loans.
The exact down payment can vary by lender, and some sources put it lower. But you can forget about putting less than 10 percent down, and it could conceivably be more like 25 percent if you’re purchasing a second home.
Your Cash Reserves
A lender will also want to make sure you have sufficient cash reserves to handle a large mortgage. This means you have cash tucked aside in savings, or at the very least some substantial assets that can be easily liquidated, such as retirement or other investment accounts. You probably need a sum that’s sufficient to cover from six to 12 months of mortgage payments. Be prepared to provide account statements showing your balances and how long you’ve had them on deposit.
Other Qualifying Factors
Other factors, such as your debt-to-income (DTI) ratio, might be more similar to smaller loans. You probably won’t be considered if your DTI ratio is more than 43 percent. Your DTI ratio is the percentage of your monthly income that’s dedicated to paying off loans you already have, such as student loans, credit cards, personal loans, car payments and other mortgages. The lower it is, the more room you have in your budget to handle a significant mortgage payment.
Read More: Healthy Debt-to-Income Ratio
Ideally, you’ve been at your job for a while, too, so you can show some measure of income security. You don’t necessarily need to have been with the same employer for years, but you should at least have been working in the same field. Lenders typically want to see this kind of consistency for at least the past two years.
All these criteria can vary somewhat by lender, and some secondary factors, like your DTI ratio, work hand in hand with your credit score. They can offset a poor score to some extent, or they can disqualify you if your credit score is iffy.
What You Pay in Closing Costs and Interest
You have to bring a little more money to the closing table if you take out a jumbo mortgage. The costs associated with getting this type of loan rather than a conforming mortgage are usually higher, if only because some are based on percentages of the amount you’re borrowing. For example, closing costs can run from 3 to 6 percent of the home value for any loan. So 3 percent of $600,000 is three times more than 3 percent of $200,000, and works out to $18,000 on a $600,000 property.
Interest rates don’t typically spike, however, simply because you’re borrowing more – although your credit score and other factors can impact your rate just as they would with a conforming loan. But the economy and the state of the country can have an impact on interest rates as well. Bankrate indicates that jumbo mortgage rates were as much as 0.5 to 1 percent higher than those associated with conforming loans in December 2020 amid the coronavirus pandemic.
Read More: Do Closing Costs Go Toward Home Purchase Prices?
How to Find a Jumbo Lender
You might want to look to a large bank if none of this has quelled you and you still want to take out a jumbo mortgage. An independent mortgage company that’s more likely to be flexible might be an option as well. Bankrate indicates that the worst of the pandemic panic has moved behind financial institutions, and lenders are providing these mortgages again, although many stopped doing so in 2020.
Compare rates and terms to find the best lender for you, just as you would if you were taking out any other type of mortgage. And keep in mind that lenders don’t typically label jumbo loans as such. Your loan is just automatically considered to be jumbo if you’re applying for an amount in excess of the Fannie Mae and Freddie Mac limits for your area. Different rates, terms and qualifying requirements will apply simply based on the amount of money you’re hoping to borrow.
- Consumer Financial Protection Bureau: What Is a Jumbo Loan?
- Bankrate: 2021 Jumbo Loan Limits by State
- Bankrate: What Is a Jumbo Loan and When Do You Need One?
- Rocket Mortgage: Jumbo Loans: What Are They and How Do They Work?
- Bank of America: Mortgage Loans for Higher Amounts
- Consumer Financial Protection Bureau: Conventional Loans
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.