If you’re shopping for a higher-end home or one in a more expensive housing market, such as New York, San Francisco, or Seattle, you may have trouble finding a loan large enough to purchase your dream house. Don’t worry, you still have options. One of those options is a jumbo loan. But what exactly is a jumbo loan, and who needs one? Let’s find out.
What is a jumbo loan?
A jumbo loan is a mortgage loan that exceeds the limits set by the Federal Housing Finance Agency (FHFA). Jumbo loans are called non-conforming loans because they do not conform to those limits. A loan amount doesn't have to be seven digits to be considered a jumbo loan. A mortgage of even $1 more than the loan limit for your county puts it into jumbo loan status.
In 2022, the conforming loan limit is $647,200 for a single-family home in most U.S. real estate markets. However, in markets like Alaska or Hawaii – where the median home price is substantially above the national average – the conforming limit is $970,800. Limits in other markets with high-cost housing are calculated on a county-by-county basis. To find the conforming limits where you’re looking to buy a home, check this FHFA map.
Jumbo loans vs. conforming loans
The main difference between a jumbo loan and a conforming loan is the loan amount offered. For a conforming loan, the loan amount must fall within the FHFA limits. A jumbo loan is non-conforming because its amount is above the highest amount for a conforming loan. Aside from the loan amount, there are also differences in the eligibility criteria for jumbo loans vs. conforming loans.
Jumbo loans | Conforming loans | |
---|---|---|
Maximum loan amount | Up to several million. Can vary by lender | $548,250–$822,375, depending on local housing market |
Minimum credit score | 660 - 700 | 620 |
Debt-to-income ratio | 36%-43% | 43%-45% |
Down payment required | 10% - 20% | 3% - 20% |
Jumbo loan requirements
To be approved for a jumbo loan, you must meet more stringent requirements than an applicant for a conforming loan. While different lenders have their specific processes for jumbo loans, the typical borrower requirements over the conventional loan process include:
More assets: As part of their asset review, lenders require jumbo borrowers to prove they have enough liquid assets or savings to cover one year of loan payments.
Higher credit score: To qualify for a jumbo mortgage, lenders typically require a credit score of 720 or higher. There may be wiggle room; some will accept a score as low as 660 but nothing less. A borrower with a score as low as 620 could qualify for a conforming loan with some lenders.
Increased down payment: With a higher-priced home, buyers need to make a higher down payment. Borrowers seeking conventional loans can find programs that accommodate 3%, 5%, or 10% down payments. A jumbo loan requires a down payment of at least 10%; some demand as much as 30%. If a lender accepts a down payment under 20%, the borrower will have to pay PMI (private mortgage insurance), just like with a conventional loan.
Lower debt-to-income ratio (DTI): When you shop for any type of mortgage, lenders use your DTI to get an idea of spending patterns and creditworthiness. The DTI is calculated by dividing the sum of all monthly debt payments by your gross monthly income. A DTI as high as 50% is acceptable to some lenders for a conforming loan. In contrast, a borrower seeking a jumbo mortgage should have a DTI under 43% and preferably closer to 36%.
Second appraisal: Every lender requires a home appraisal to close a loan for a property purchase to ensure that the home they are funding is worth the loan amount or more. For a jumbo loan, the lender may require an additional appraisal. You can think of this as a second opinion. If you are applying for a jumbo loan in an area with very few comparable property sales, an appraisal may cost more than an appraisal in neighborhoods with more frequent sales.
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What are the benefits of a jumbo loan?
1. You can buy a home where the loan amount that you need exceeds the conforming loan limits. Jumbo loans make it possible for people to buy in a highly competitive market or to purchase a larger home than they could with a conventional mortgage.
2. A jumbo loan can be used to purchase any type of property. As long as a borrower meets the lender’s loan requirements, they can buy a rental property, vacation house, or personal residence.
3. A buyer can use a jumbo loan to purchase or refinance land. A borrower can get a jumbo loan for up to 20 acres of land as long as the land is not zoned agricultural.
4. You can do a cash-out refinance on their loan as long as equity is left. A cash-out refinance allows borrowers to use the equity in the home by refinancing their existing mortgage to get a larger mortgage that pays off the existing loan and get money from the bank for the difference. The equity must equal 10-30%, depending on the property type. A borrower can take out a jumbo loan for their house and then a few years later do a cash-out refinance to fund a special vacation or other major purchase.
For example, if the borrower has a $900,000 jumbo loan paid down by 25%, the loan balance is $675,000. Suppose the borrower needs 10% equity still in the home but would like cash for a renovation project. The borrower could refinance the loan for $810,000, leaving 10% equity, and receive cash of $135,000, the difference between $810,000 and $675,000.
How can I find out what the conforming loan limits are in my county?
To learn about conforming loan limits in your specific county, you should first consult with a lender. Conforming loan limits by county are updated annually on the FHFA map. The map is color-coded by loan-limit range. To find a specific county limit, scroll over that county on the map.
Are there limits on jumbo loans?
Jumbo loans do have limits, but unlike a set point with conventional loans, limits vary by lender. Some lenders will extend up to $2 or $3 million on a jumbo loan. Others will lend as much as $10 to $15 million and beyond.
Jumbo loan rates
You may think that taking out a jumbo loan means higher mortgage interest rates, but this actually isn’t the case. In fact, jumbo mortgage rates are often similar if not lower than conforming mortgage rates. This is because high-income earners tend to have the financial ability to pay back their loans, so lenders often find them lower-risk than the average borrower, resulting in interest rates that are similar to conforming loans.
Does the VA offer jumbo loans?
While the federal government does not typically back jumbo loans, there is one exception - VA loans. Veterans Administration (VA) does offer jumbo loans to qualifying service members, veterans, and surviving spouses, but there are limitations and restrictions.
Who should consider a jumbo loan?
If the home of your dreams, that rental property, or your vacation home will require a loan amount that’s higher than what you can get with a conforming loan, you’ll need a jumbo loan. Take a close look at your financials, as jumbo loans come with higher monthly payments and a more significant down payment requirement.
Jumbo mortgages are considered most appropriate for high-income buyers who earn between $250,000 and $500,000 a year. If you have a high credit score and low DTI and feel you can comfortably afford the higher payments, a jumbo loan can get you across the finish line and into your dream property.
When to avoid a jumbo loan?
Whether a jumbo home loan is a good idea for you depends on your financial situation. Keep in mind that qualifying for a large loan doesn’t necessarily mean it’s a wise choice to borrow that amount.
Jumbo loans are more expensive at every step in the process – downpayment, closing costs, and appraisal fees. As with any loan option you’re considering, it’s best to think about whether you’ll be able to afford the monthly mortgage payments while also having enough money left over for other expenses, including home maintenance. Keep in mind that a large, expensive property may require a larger budget for upkeep.
Also, you’ll likely want to make sure that you’ll still have money left over to meet your savings and retirement contribution goals. It’s important to consider your entire financial situation when deciding whether or not to take out a jumbo loan.
LEGAL: Redfin does not provide legal, financial, or tax advice. This article is for informational purposes only, and is not a substitute for professional advice from a licensed attorney, financial advisor, or tax professional.