Most homeowners haven't heard of jumbo loans until they're in a position where they need one. Jumbo loans — also known as jumbo mortgages — have higher loan amounts than their traditional counterparts. They're used to finance more expensive properties.
The process is a bit different for obtaining a jumbo loan. Lenders consider these loans riskier, so they have more stringent underwriting and down payment requirements. If you're in the market for a jumbo loan, you should be prepared for the additional requirements and know what to expect from your lender.
What is a jumbo loan?
Many lenders sell their mortgages to Fannie Mae or Freddie Mac, two GSEs or Government Sponsored Enterprises. When either agency buys the loan, it assumes the risk: if, for some reason, the loan goes into foreclosure, Fannie Mae or Freddie Mac assumes the loss, not the lender. The agencies were created to encourage banks and credit unions to originate mortgages and increase homeownership rates in the U.S.
However, both Fannie Mae and Freddie Mac have similar eligibility criteria for their loans. Loans that meet this criteria are known as conforming loans, meaning they conform to Fannie Mae or Freddie Mac standards.
Jumbo loans are non-conforming loans because they exceed the maximum loan amount to be eligible for purchase by Fannie Mae or Freddie Mac. The limit is set by the Federal Housing Finance Authority (FHFA) and varies by county. Every year, the FHFA announces new loan limits for conforming loans.
The current limit is $766,550 for most counties, though it goes up to $1,149,825 in some areas. If you need a mortgage amount higher than the conforming limit, you'd need a jumbo loan.
You can check out this map for current conforming loan limits by county.
Jumbo loans vs. conforming loans: key differences
While the loan amount would push you into the jumbo loan category, there are other differences between jumbo and conforming loans.
Since non-conforming loans can't be sold to Fannie Mae or Freddie Mac, lenders consider them riskier. After all, if the borrowers aren't able to make loan payments, the lender faces a potential loss — and for a much higher loan amount.
Because of this, interest rates are typically higher for jumbo loans. They also have higher down payment requirements. Conforming loans may require a down payment of as little as 3% and still meet Fannie Mae or Freddie Mac criteria (though this can go up to 20%, depending on the loan). By contrast, lenders may require a down payment between 10% and 30% for a jumbo loan.
Eligibility criteria for jumbo loans
To reduce risk, lenders are more stringent with their underwriting criteria for jumbo loans.
Fannie Mae and Freddie Mac require a minimum credit score of 620. Jumbo loans generally need a credit score of 680 or higher.
Mortgages also have debt-to-income requirements: the total of your monthly payments on all loans, credit cards, and other obligations compared to your income. Conforming loans have a maximum debt-to-income ratio of anywhere between 43–50%. Jumbo loans preferably have a debt-to-income ratio below 43% to qualify.
Additionally, jumbo loans often require you to have cash reserves. In some cases, you may need enough reserves to cover 6–12 months of mortgage payments in a bank account or retirement funds. The lender will verify your reserves through bank statements.
For any mortgage, you'll need to provide documentation, such as proof of your income and assets. Jumbo loans require more extensive documentation. Fannie Mae and Freddie Mac both have automated systems for approval: the lender submits your application and the agency approves or denies, based on the information provided.
Jumbo loans are less likely to have an automated process, which means a human will review your loan and determine its approval. You’ll have a lot of back-and-forth with the lender or an underwriter (or both). A seasoned loan officer can help you through underwriting, as well as answer any questions that may come up during underwriting.
Check out this article to learn more about the underwriting process.
Weighing the pros and cons of a jumbo loan
Because of their higher loan limit, jumbo loans are the right fit for some borrowers. You'll have the tradeoff of more rigorous underwriting, but you'll be able to buy the home of your dreams — without the restrictions of a conforming loan.
However, the jumbo mortgage also comes with a larger monthly payment, due to the combination of the loan amount plus a higher interest rate. You're also taking on more debt, which has its own risks if your financial situation changes.
If you're in the market for a luxury home, you may not be able to avoid a jumbo loan. But if you're right on the border between a jumbo loan and a conforming loan, you'll want to consider if you want to go the jumbo loan route or find a less expensive property..
