You might need a jumbo mortgage (aka jumbo loan) if you’re buying an expensive property or even a regular home in a pricey market. That’s because conforming loans — those meeting Fannie Mae and Freddie Mac guidelines — limit how much you can borrow. While a jumbo loan lets you borrow more, you’ll need a high credit score and a large down payment to qualify.
A jumbo mortgage is a home loan that exceeds the limits the Federal Housing Finance Agency (FHFA) sets each year. Because jumbo mortgages don’t adhere to the FHFA standards, Fannie Mae and Freddie Mac can’t buy, guarantee, or securitize them — making these loans riskier for lenders. (Fannie Mae and Freddie Mac are government-sponsored entities that keep the mortgage market running smoothly.)
Like other mortgages, jumbo loans are available with fixed or adjustable interest rates and various terms. However, jumbo mortgages are larger and riskier for lenders, so they have tougher qualification standards and higher closing costs than their conforming counterparts.
Each year, the FHFA sets loan limits for mortgages to determine which mortgages are eligible to be bought and sold by Fannie Mae and Freddie Mac. Mortgages within these limits are considered conforming, and those outside are non-conforming. The limits vary by county as some real estate markets are more expensive than others.
For 2023, the limit for single-family homes is $726,200 in most parts of the U.S. and up to $1,089,300 in Alaska, Hawaii, and other high-cost areas. (You can find your area’s conforming loan limits on FHFA’s map.)
A jumbo mortgage doesn’t automatically equate to a jumbo interest rate — your rate might even be lower than the current mortgage rates for conforming loans. Ultimately, the rate depends on your lender, the market conditions, and your financial situation.
According to Bankrate, the average jumbo mortgage rates as of Jan. 17 are:
- 6.40% for a 30-year fixed jumbo loan
- 5.75% for a 15-year fixed jumbo loan
- 6.06% for a 7/1 ARM jumbo loan
- 5.60% for a 5/1 ARM jumbo loan
Jumbo loans have stricter qualification requirements than other types of mortgages. While these vary by lender, here’s what to expect.
- Credit score: A credit score predicts how likely you are to repay a loan on time. Credit scores generally range from 300 to 850 (higher is better). You may need a minimum credit score of 700 to qualify for a jumbo loan, but the exact score depends on the lender and the loan terms.
- Down payment: Jumbo loans usually have higher down payment requirements than conforming loans (which can be as low as 3%). Lenders might ask for 20% down for a single-family house — or more for a second home or multifamily unit.
- Debt-to-income ratio: Your debt-to-income (DTI) ratio compares how much you earn to how much you owe (calculate yours here). Lenders like to see a low number because it means you’re more likely to manage your mortgage payments successfully. Lenders generally want to see DTIs of 43% or below for jumbo loans.
- Cash reserves: Lenders might expect you to have ample cash reserves because it means you’ll be less likely to default on the loan.
- Property type: The government doesn’t restrict how you use a jumbo loan. If you meet your lender’s requirements, you can use a jumbo mortgage to finance a primary residence, vacation home, or investment property.
Jumbo and conforming loans both help you finance a home purchase, but there are key differences.
| Jumbo mortgage | Conforming mortgage |
|---|---|
| Strict qualification standards | Looser lending requirements |
| May require cash reserves | Cash reserves less important |
| Higher down payment | Down payment as low as 3% |
| Higher closing costs | Lower closing costs |
| Higher monthly payments | Lower monthly payments |
A jumbo mortgage can help you buy the home of your dreams. Still, it’s important to consider the benefits and drawbacks before making any decisions on whether a jumbo mortgage is right for you.
Pros of jumbo mortgages
- Larger loan allows you to finance a luxury home or a house in a high-cost area.
- May offer competitive interest rates that are lower than conforming loan rates.
- Can be used to buy a primary residence, vacation home, or investment property.
Cons of jumbo mortgages
- Higher qualification standards may require a high credit score, low DTI, and a sizeable down payment.
- Higher closing costs.
- May need cash reserves to cover up to 12 months of housing costs.
Because there are various types of mortgage loans, you have a few options if you’re in the market for an expensive home that would exceed Fannie Mae and Freddie Mac loan limits. One is to increase the size of your down payment so the financed amount falls within conforming loan limits. You can also try for a piggyback loan, a strategy that lets you buy a home using two conforming mortgages. Otherwise, you’ll need a jumbo mortgage to borrow more than the conforming loan limits allow.
If you decide a jumbo mortgage is right for you, it’s a good idea to shop around and compare at least three lenders to ensure you lock in the best deal.
Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.
This article was first published on SFGate.com and reviewed by Jill Slattery, who serves as VP of Content for the Hearst E-Commerce team. Email her at jill.slattery@hearst.com.