What Is a Jumbo Loan?
A jumbo loan, also known as a jumbo mortgage, is a type of home mortgage that exceeds the lending limitsset by the Federal Housing Finance Agency (FHFA) for conventional mortgages. Unlike those mortgages, a jumbo loanis not eligible to be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac. Lenders offer jumbo loans to finance luxury properties and homes in very expensive local real estate markets and have more stringent underwriting requirements for them.
Key Takeaways
- A jumbo loan, also known as a jumbo mortgage, is a type of financing that exceeds the limitsset by theFederal Housing Finance Agency (FHFA) and cannot be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac.
- Borrowers must meet more rigorous credit requirements than those who applying for a conventional loan.
- Approval requires a stellar credit score and a very lowdebt-to-income (DTI) ratio.
- The averageannual percentage rate (APR)for a jumbo mortgage is often on par with conventional mortgages.
Advantages of a Jumbo Loan
The primary advantage of a jumbo loan is that it allows borrowers to take out a mortgage that exceeds the conforming loan limits put in place by the FHFA.
The conforming loan limit for single-family homes in 2024 is $766,550 in most of theU.S. but as high as $1,149,825 in some places.
If you have your sights set on a home that costs close to a million dollars or more—and you don't have that much cash sitting in a bank account—you'll probably need a jumbo mortgage. And if you're trying to obtain one, you'll face more exacting credit requirements than homeowners applying for a conventional loan. That's because jumbo loans carry more risk for the lender since there is no guarantee by Fannie Mae or Freddie Mac. There's also more risk simply because more money isinvolved.
How a Jumbo Loan Works
Like traditional mortgages, the credit requirements for obtaining a jumbo mortgage have become increasingly stringent since the financial crisis of 2008. To get approved, you'll need a stellar credit score—700 or above—and a favorable debt-to-income (DTI) ratio. Although they are nonconforming mortgages, jumbos still must meet the guidelines of what Regulation Z of the federal Truth in Lending Act defines as a "qualified mortgage," based on the borrower's DTI and other factors.
You'll need to prove that you have sufficient income and cash reserves to cover your payments. The specifics will depend on the size of the loan, but all borrowers are likely to need to provide at least 30 daysof recent pay stubs, 60 days of recent bank statements, and two years of annual tax returns and W-2 forms. If you're self-employed, the documentation requirements can be greater.
The borrower also needs sufficient provableliquid assets to qualify, in addition to cash reserves equal to six to 12 months of the mortgage payments. They must also provide documentation of their nonliquid assets (like other real estate) and of any other loans they hold.
Jumbo Loan Interest Rates
While jumbo mortgages used to carry significantly higher interest rates than conventional mortgages, thegap has been closing in recent years. Today, the averageannual percentage rate (APR)for a jumbo mortgage is often on a par with conventional mortgages—and in some cases, actually lower. As of August 25, 2024, Wells Fargo, for example, charged an APR of6.053% on a 30-year fixed-rate conforming loan and6.336% for the same term on a jumbo loan.
Note
Even though the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac don't handle them, jumbo loans are often securitized by other financial institutions for sale to investors.
Down Payments on Jumbo Loans
Down payment requirements on jumbo loans have also loosened over the years. At one time, lenders routinely required 30% down payments, compared with 20% or less for conventional mortgages. Now, that figure has fallen to as low as 10% in some cases. As with any mortgage, there can be advantages to making a higher down payment—among them avoiding avoid the cost of private mortgage insurance (PMI), which lenders require for loans with down payments under 20%.
Tax Breaks on Jumbo Loans
Don't expect a jumbo tax break if you take out a jumbo loan. The cap on the mortgage interest deduction is currently limited to $750,000 in loan debt ($375,000 for married couples filing separately) for mortgages secured after 2017.
Good Candidates for Jumbo Loans
These mortgages are considered most appropriate for high-income earners who make at least $250,000 to $500,000 a year but lack the cash to buy an expensive home outright. This segment is sometimes referred to as HENRYs, an acronym for high earners, not rich yet.
These are just the sorts of individuals that financial institutions love to sign up for long-term products, partly because they often need (and will pay for) additional wealth managementservices. Plus, it's more economical for a bank to administer a single $2 million mortgage than 10 loans valued at $200,000 apiece.
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What Is Considered a Jumbo Loan?
A loan is considered jumbo if it exceeds the maximum loan limits for Fannie Mae and Freddie Mac conforming loans—currently $766,550 for single-family homes in most parts of the U.S. but up to $1,149,825 in certain more expensive areas.
What Are the Requirements to Get a Jumbo Loan?
To be approved, you'll typically need a high credit score—700 or above—a low debt-to-income (DTI) ratio, and evidence of sufficient income and assets to keep up with the payments.
What Is the Down Payment on a Jumbo Loan?
In some cases you may be able to obtain a jumbo loan with a down payment as low as 10%. In others, a lender might require 25% or 30%.
The Bottom Line
A jumbo loan, also known as a jumbo mortgage, is a type of financing that exceeds the conventional loan limitsset by the government for purchase by Fannie Mae or Freddie Mac. Would-be borrowers face more rigorous credit requirements than those applying for a conventional loan, including an excellent credit score and a very lowDTI ratio.Jumbo loans can make sense for borrowers with substantial incomes who lack the cash to buy an expensive home outright or would rather use their cash for other purposes.
