What is a jumbo loan — and do you need one?

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If you're shopping for a large home with a lot of bedrooms and in-demand features, you might find that the only mortgages big enough are jumbo mortgages. 

Any mortgage over a specific dollar amount set by the Federal Housing Finance Agency (FHFA) is called a jumbo loan. The cutoff puts many upscale suburban homes firmly in the jumbo category, so despite what you might assume from the eyebrow-raising name, this type of home loan isn’t an exotic product restricted to the wealthiest 1%.

What qualifies as a jumbo loan?

The cutoff for jumbo loans is updated each year by the FHFA, and it's known as the conforming loan limit. 

A conforming loan is a mortgage that can be bought by Fannie Mae or Freddie Mac, the companies created by Congress to purchase home loans from lenders. Loans for amounts up to the conforming loan limit can qualify as conforming loans if they also meet some other requirements. 

A loan for an amount over the conforming loan limit can't be a conforming loan and is automatically considered a jumbo loan instead.

How does the FHFA determine the conforming loan limit?

The conforming loan limit is based on average home prices across the U.S. Some areas where the cost of living is high have home prices well above the average, and the FHFA takes that into account and sets a higher "ceiling" limit for those places. The ceiling limit is 50% higher than the conforming loan limit for the rest of the country. 

In counties where home prices are high, the FHFA sets an adjusted conforming loan limit that can go up as far as the ceiling limit. And by law, the conforming loan limit in Alaska, Hawaii, Guam, and the U.S. Virgin Islands is equal to the ceiling limit.

In other words, the cap on conforming loans can be different depending on where you're buying a home. In counties where prices are around the average or below it, you're looking at the baseline limit that ordinarily applies. But in a high-cost area, the limit may be somewhere between the baseline limit and the ceiling limit. And it will be the ceiling limit in the states and territories where that's mandated by law. 

What is a jumbo loan in 2022?

In 2022, the baseline conforming loan limit is $647,200, and the ceiling limit is $970,800. 

So in most of the U.S., a jumbo loan in 2022 is any mortgage for more than $647,200. But in high-cost areas, the cutoff for a jumbo loan is somewhat above that. You can check the loan size that qualifies as a jumbo loan for any county using this map from the FHFA.

And in Alaska, Hawaii, Guam, and the U.S. Virgin Islands, a jumbo loan is a mortgage for an amount greater than $970,800.

What's the difference between a jumbo loan and a conforming loan?

An obvious difference between jumbo loans and conforming loans is their size. A jumbo loan is going to be bigger than a conforming loan in any particular county. 

But there are other differences, too. Here's how these two types of mortgages compare:

Conforming loanJumbo loan
SizeUp to the conforming loan limit for the county where the home is locatedAbove the conforming loan limit for the county where the home is located
Interest ratesDepend on market conditions and factors like the borrower's credit score and down paymentTypically 1 or 2 percentage points above conforming loan rates
Loan paymentsPayments must cover both interest and principal.
Loan balance goes down as the loan is paid off
Some loans may allow interest-only payments.
Some loans may allow the balance to increase
Qualifying for the loanCredit score must be at least 620.
Debt-to-income ratio generally must be below 45%.
Cash reserves equal to two months' loan payments often required
Credit score of at least 720 likely required.
Debt-to-income ratio usually must be below 36%.
Cash reserves equal to a year of loan payments may be required.
Down paymentMay be as low as 3% with private mortgage insuranceUsually must be at least 20% to 30%

Who makes the rules for jumbo loans?

Conforming loans can't be larger than the conforming loan limit set by the FHFA, and they have to follow a set of rules from Fannie Mae and Freddie Mac. These rules set minimum down payment and eligibility requirements, and they regulate the features of the loan. 

For instance, a conforming loan has to be fully amortizing, meaning that payments cover both interest and principal and that the balance goes down as you pay off the loan.

Jumbo loans, on the other hand, don't have to follow these rules. Instead, lenders decide for themselves what loan features to offer and which borrowers are eligible, and they might offer things that wouldn't be possible for a conforming loan. For example, a jumbo loan could be an adjustable-rate mortgage (ARM) with interest-only payments that don't bring down the loan's principal, followed by a balloon payment that requires you to pay a large amount all at once.

Jumbo loans aren't standardized like conforming loans. So if you're shopping for a jumbo loan, you need to be especially careful to examine each loan offer individually. You can't assume that a jumbo loan from one lender will work the same way as a jumbo loan offered by somebody else. 

What's the interest rate for both loan types?

The interest rates on mortgages depend on interest rates in the economy as a whole. If rates are low overall, you're more likely to be offered a good rate, whether you're shopping for a conforming loan or a jumbo loan.

Lenders also look at your loan application to decide what interest rate to offer you. For instance, a great credit score or the ability to make a larger down payment could help you snag a better rate. That's the case for both conforming loans and jumbo loans.

But there's also an important difference between rates on conforming vs. jumbo loans. In general, you can expect the rates on jumbo loans to be at least 1 to 2 percentage points higher than what you'd pay on a conforming loan. 

That's because a lender is taking on more risk with a jumbo loan. They can't sell this type of loan to Fannie Mae or Freddie Mac, so it's less certain that they'll find a buyer for it. And, there's more money on the line. Lenders make up for that extra risk by charging steeper rates.

How easy is it to qualify for a jumbo loan?

Conforming loans are pretty accessible compared to other types of mortgages. Requirements vary by lender, but borrowers with credit scores as low as 620 may qualify. A borrower's monthly payments on debt (including the mortgage they're applying for) can be as much as 45% of their income each month, and a down payment of just 3% is allowed in some cases. Also, lenders generally check that the borrower has enough cash in the bank to cover a couple months of mortgage payments.

Lenders are a lot more choosy about approving people for jumbo loans. Here's what they typically look for:

  • A credit score of 720 or above. No surprise, lenders expect a very solid track record of paying money back before they'll consider you for a loan this large. 
  • A debt-to-income ratio of no more than 36%. You need more cash flow to cover the heftier payments, and lenders want mortgage and other debt payments to take up a smaller portion of your income. This way, you have more wiggle room if your income dips at some point. 
  • A down payment of 20% to 30%. That reduces the chances that you end up owing more than the home is worth if its value falls.
  • Higher cash reserves. Lenders may want to see a years' worth of mortgage payments in a bank account before they'll give you the green light.

Closing on the home

Closing costs on a conforming loan usually make up 2% to 5% of the loan amount. That includes the cost of an appraisal, which lets the lender know that the house is actually worth what you're paying for it.

For jumbo loans, closing costs are typically higher because lenders examine applications for these loans more carefully, which takes time and money. You might also have to pay for additional appraisals, and the appraisal fees may be higher than they'd be for a less expensive property.

Who should consider a jumbo loan?

If you want to buy a home that costs more than the conforming loan limit for the county it's in, you might want to consider a jumbo loan. This option makes the most sense if you're in a good position to qualify for it.

First, you should have a high income so you can afford the mortgage payments. Let's say you're shopping for a $700,000 mortgage. A rough estimate says that with a 6.5% interest rate on a 30-year fixed-rate loan, you're looking at monthly payments of a little over $4,400. If you have no other debt payments, you'd need an income of almost $12,300 a month to keep your debt-to-income ratio below 36%.

You also want to have a good credit score and significant cash reserves in the bank. It's hard to achieve those conditions overnight, so for most people, a jumbo loan is only worth considering once their finances have been on sound footing for a while.

And finally, shopping for a jumbo loan is often more feasible if you already own a home. If you've built up equity, you have a store of value that you can use to make the big down payment needed for a jumbo loan. A borrower taking out a jumbo loan generally won't qualify for a down payment assistance program, so it's on you to come up with the full amount. 

Jumbo loans aren't just super-sized clones of smaller mortgages. Compared to conforming loans, jumbo loans can have a wider variety of features, and they're harder to qualify for. But despite those differences, the same strategies you can use to shop for a smaller loan — like researching lenders, reviewing multiple offers, and seeking advice from a housing counselor or other experts — can help you find a jumbo loan that's right for you.

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