What Are Jumbo Loans?

Securing a jumbo mortgage may be simpler than you expect. This guide will help you understand what a jumbo loan is and determine if it's the right fit for your financial situation. What Is a Jumbo Loan? A jumbo loan, also known as a non-conforming mortgage, is a home loan that exceeds the limits set by Fannie Mae and Freddie Mac. These two entities, established by Congress, help stabilize the housing market by purchasing mortgages that conform to their guidelines, which include limits on loan amounts, down payments, credit scores, and reserve requirements. In 2024, the national limit for a conforming loan is set at $766,550 for a single-family home, but this cap can be higher in certain high-cost markets. Loans that exceed these limits are categorized as jumbo mortgages. When Should I Use a Jumbo Mortgage? A jumbo mortgage is necessary when you're borrowing more than the conforming loan limit in your area. In most places, this means loans above $766,550 will require a jumbo mortgage. However, some high-cost areas have higher conforming loan limits, and you'll need to check your specific location’s limits. Even in these areas, some lenders may still treat any loan above $766,550 as a jumbo mortgage, so it’s important to verify with your lender. Is Qualifying for a Jumbo Mortgage Different? Qualifying for a jumbo loan is similar to qualifying for a conforming loan, but the requirements can be stricter in some areas. Lenders will evaluate your credit score, down payment, debt-to-income (DTI) ratio, and the amount of reserves (cash or assets) you have left after closing. While the credit score requirement is often around 680, having a higher score (780 or above) can help secure better rates. Jumbo loans typically require more reserves than conforming loans, often 12 months’ worth, with half being liquid assets like savings. However, there is some flexibility in jumbo approvals, including: Higher DTI ratios: If you have strong reserves, some lenders may accept a DTI ratio higher than 43%. Flexible income calculations: If you’ve recently started your own business but have a long history in the same field, some jumbo loans may require just one year of self-employment tax returns instead of the standard two years. Low down payment options: You may be able to get a jumbo loan with as little as 10% down, without the need for mortgage insurance. However, rates may be slightly higher in these cases. How Do Jumbo Rates Compare to Conforming Rates? Historically, jumbo loans had interest rates at least 0.25% higher than conforming loans due to the higher risk for lenders. However, in recent years, market conditions have allowed jumbo rates to be more in line with conforming loan rates. Be sure to ask your lender to compare the rates and options available for your specific situation.