What Is a Jumbo Loan?

What Is a Jumbo Loan?

Jumbo loans allow borrowers to finance homes for amounts greater than the maximum allowed on loans eligible for purchase by Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that buy and sell mortgages in the United States.

The FHFA, which regulates the GSEs, sets criteria loans must meet to be eligible for purchase by Fannie Mae and Freddie Mac. Loans that meet these criteria are called conforming loans, and those that exceed the limit are known as jumbo loans.

Conforming loan limits vary by county and are typically reflective of home values in the communities where they apply.

Jumbo Loans vs. Conforming Loans

For 2024, the conforming loan limit (CLL) on a single-family home loan for the vast majority of counties in the U.S. is $766,550. The maximum CLL for 2024, $1,149,825 (150% of the national median), applies in Alaska, Hawaii, Guam, the U.S. Virgin Islands and in counties of the lower 48 states where the nation's median home costs are highest.

The FHFA provides an interactive map you can use to check the CLL for any county in the U.S. Because jumbo loan amounts exceed their local CLLs, they are considered non-conforming loans.

How Do Jumbo Loans Work?

The ability to sell loans to Fannie Mae and Freddie Mac provides lenders a kind of safety net. It stands to reason, then, that lenders would be extra cautious when issuing nonconforming loans, including jumbo loans. Lenders typically set steeper credit eligibility and income requirements on jumbo loans. Also, because properties financed by jumbo loans are often significantly more expensive than other homes in their communities (and therefore difficult to price based on comparable properties), lenders often require two appraisals to determine their market values.

Like conforming loans, jumbo loans are available with both fixed and adjustable rates. Historically, lenders have charged a premium of up to 1 or more percentage points on jumbo loans, compared with prevailing rates on comparable conforming loans. As rates have risen in recent years, however, the pricing margin between jumbo interest rates and conforming rates has narrowed. In February 2024, the Federal Reserve Bank of St. Louis's 30-Year Fixed Rate Jumbo Mortgage Index, a market indicator reflecting data on more than one-third of the jumbo loans issued nationally, was 7.3%, while the comparable 30-Year Fixed Rate Conforming Mortgage Index was 6.8%. Some lenders even offer jumbo at rates below those on comparable conventional loans.

Requirements for Jumbo Loans

Higher Credit Score

Some lenders require a FICO^® Score^☉ of 720 or better for many jumbo loans, and typically will accept no score lower than 700. Lenders typically require scores of at least 620 for conforming mortgages.

Lower Debt-to-Income Ratio (DTI)

Lenders issuing jumbo loans typically exclude applicants with a debt-to-income ratio—the percentage of monthly pretax income used for debt payments—that exceeds 36%. In contrast, DTIs as high as 50% are acceptable on some conforming mortgages.

Higher Down Payment

Issuers of conforming loans may accept down payments as low as 3% and typically require borrowers to pay private mortgage insurance (PMI) premiums when down payments are less than 20%. Jumbo loan issuers, on the other hand, typically require at least 10% down, and some require down payments as high as 30%. If you put down less than 20% on a jumbo loan, you should expect to pay PMI.

Significant Cash Reserve Requirements

To minimize the chances a borrower will miss payments on a jumbo loan, lenders often require applicants to show they have savings or other assets sufficient to cover as much as 12 months of loan payments.

Dual Appraisals

Lenders routinely require a home appraisal to confirm a property's value before they agree to finance it. Because jumbo loans apply to properties that are exceptionally large or have unusual amenities, the customary appraisal tactic of comparing the home to recently sold properties in the area is often impossible. That can add complexity and cost to the appraisal process. Many lenders require two appraisals before approving a jumbo loan.

Pros and Cons of Jumbo Loans

Pros

• Access to high-end properties: A jumbo loan can enable you to finance a home with a considerably higher market value than other homes in your community.
• Piggyback alternative: When seeking a mortgage for an amount that exceeds the local CLL, an alternative to a jumbo loan is a piggyback loan. It consists of two separate mortgages—a primary loan in an amount equal to the CLL (typically with a 10% down payment) and a second loan that covers the remainder of the home price, plus enough to place an additional 10% down on the primary loan. (A 20% down payment on the primary loan enables borrowers to sidestep private mortgage insurance requirements.) Getting two mortgages on the same property can be difficult, however. Piggyback loans also require two sets of closing costs and are typically difficult to refinance.

Cons

• High costs: The price tag on a property that requires a jumbo loan is high to begin with, and when the higher interest rates and closing fees typical of jumbo loans are applied to their loan amounts, borrowing costs alone can run into millions of dollars over the life of a loan. Use the Experian mortgage calculator to get an idea of what a loan might cost you in interest.
• Stiff eligibility requirements: Unless you have credit scores of roughly 700 or better, DTI ratio of about 36% or lower, and access to significant cash savings or other assets, you may not qualify for a jumbo loan.
• Limited tax deductibility: Revisions to federal tax law enacted in 2018 lowered the maximum amount of mortgage debt for which interest payments are deductible from $1 million to $750,000. So, if you itemize your tax deductions and take out a new jumbo loan, you could see a drop in your annual deduction.

When Does It Make Sense to Get a Jumbo Loan?

If you're in the market for a home that's significantly more costly than the average house in your locale, a jumbo loan may be your best financing option.

Applying for a jumbo loan only makes sense if you meet the rigorous qualification requirements. Ideally, you'll have a credit score of 700 or above and enough cash to put at least 20% down and still have plenty left over for extra appraisals, closing costs and six months of loan payments. If you can't meet these stiff requirements, you may be best off avoiding a jumbo loan.

Even if you qualify, you may want to think twice if you expect to need to resell the property quickly at some point. Potential buyers will have to meet all the jumbo-loan requirements you did to qualify for financing. Even in hot real estate markets, properties priced significantly above the local median can take longer to sell than more traditional properties due to the smaller pool of potential buyers.

The Bottom Line

Qualifying for a jumbo mortgage can be intimidating, and the loan will carry high interest rates and fees even for applicants with very good credit. If your sights are set on an exceptionally pricey home and you have the means needed to qualify, a jumbo loan may be the best option for financing your dream home.

Anytime you're planning to apply for a mortgage, it makes sense to check your credit score for free from Experian to get an idea where you stand in the eyes of potential lenders.