What Is A Jumbo Loan And How Do I Get One?

If you live in an area where there are no lower cost housing alternatives available, or you’re looking to purchase a higher-end home, you may need to consider a jumbo loan to get the financing you need to meet your home buying goals.

Let’s take a look at what a jumbo loan is, the requirements lenders are looking for and how to get approved for one.

What Is A Jumbo Loan?

A jumbo mortgage is a loan that exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA) each year. Specifically, it’s a conventional nonconforming loan.

Of course, if you’re looking for a home in the metro areas around New York City, San Francisco or any of the other most expensive areas of the country, you should expect that a conforming loan – the most common type of conventional home loan – simply won’t be big enough to cover the purchase price of even a modest home. For those purchases, borrowers will need a jumbo loan.

How Do Jumbo Mortgages Work?

Jumbo loans are the most common type of conventional nonconforming home loans. These loans are offered by private lenders without any support from the government.  As a general matter, these loans cost slightly more than their conforming counterparts and lack the consumer protections conforming lenders must provide.

Conforming loans are another type of conventional loan – a loan made by private lenders without government backing. Mortgage lenders who make these loans generally sell them to Fannie Mae and Freddie Mac after origination, so they must adhere to their rules. In general, jumbo loans work the same way as any other type of mortgage loan. The big difference between jumbo loans and conventional loans is that lenders operate in a mostly regulation-free environment in which they are free to offer their loans at their own discretion with no required disclosures aimed at protecting consumers.

What Are Conforming Loan Limits?

Jumbo loans are needed to purchase homes with prices that exceed conforming loan limits. Those limits are imposed by Fannie Mae and Freddie Mac, who will not buy mortgage loans that exceed their loan caps.

The conforming loan limit for 2023 is $726,200 for most areas and up to $1,089,300 in the most expensive housing markets in the U.S., including Los Angeles, New York City and Hawaii.

To find out the limits where you are planning to move, use the FHFA’s look-up map.

What Are The Advantages Of A Jumbo Loan?

For borrowers who want to buy a home in more expensive areas of the country, or are shopping for a luxury property, a jumbo loan may be your only option, unless you have the cash to make up the difference between the conforming loan limits and the purchase price.

Let’s say you want to buy a house in Honolulu for $2 million dollars. You could finance up to $1,089,300 and use a down payment of $910,700 to make up the difference:

$2,000,000 − $1,089,300 = $910,700

What Are The Disadvantages Of A Jumbo Loan?

Because this loan may come at a higher risk to the lender, it typically has slightly stricter qualification requirements than typical conforming loans that possess lower limits and the interest rate might be slightly higher to reflect the risk of lending a large amount of money to a single individual or family unit.

In addition, home buyers in the nonconforming loan marketplace are offered fewer consumer protections than non-conforming loans.

Jumbo Loan Limits And Requirements

In general, an underwriter evaluates a jumbo loan with many of the same lending criteria as they would a conventional loan – even if those requirements are a bit more stringent. You should expect your lender to request both your credit score and debt-to-income ratio (DTI), which compares your minimum monthly installment and revolving debt payments to monthly income.

However, it’s not uncommon for lenders to request jumbo mortgage applicants to meet special demands before approving them for the loan. Because lenders take on higher risk with jumbo loans, these extra measures help ensure they are lending money to borrowers who have the capacity to make payments.

For instance, jumbo loan lenders often require proof of consistent income and cash reserves or liquid assets to confirm you have the funds to pay back your loan. On top of that, you might pay higher closing costs and a larger down payment.

More specifically, what you need to qualify for this loan will depend on what type of jumbo loan you’re getting and the amount you need to borrow.

Purchasing A Home With A Jumbo Mortgage

Because jumbo loans are generally non-conforming, lenders are free to offer loans according to their own terms and requirements. That means they can ask for higher down payments, set higher interest rates and require higher credit scores.

Rocket Mortgage^® offers the Jumbo Smart loan, so we’ll take a look at its features as an example, not as a sample representative of the loans most lenders offer.

The Jumbo Smart loan offers loan amounts up to $3 million.

Benefits Of A Jumbo Smart Mortgage

There are two main benefits to a Jumbo Smart loan.

We do not require private mortgage insurance (PMI), which represents a significant monthly savings if you’re unable to put 20% down on your jumbo mortgage loan.

Additionally, Rocket Mortgage’s automated Jumbo Smart mortgage application process essentially treats Jumbo Smart loans like conforming loans in terms of required documentation. That means that you will receive the same disclosure and other consumer protections, as if you were getting a conforming loan.

That’s an important point, because the nonconforming loan market typically doesn’t offer the level of consumer protections available to those applying for conforming loans. That’s because the government’s most influential tools, the policies of the FHFA and the involvement of the FHA, Fannie Mae and Freddie Mac have no role in this market, so there’s no oversight beyond general prohibitions against fraudulent or misleading statements.

Loan Limits On Rocket Mortgage’s Jumbo Smart Mortgage

We take a different approach to loosen rather than restrict access to jumbo loans. It provides up to $3 million for a 30-year, fixed-interest rate mortgage loan on 1 – 2-unit properties, or up to $2.5 million with a 15-year fixed or an adjustable-rate mortgage (ARM).

Note that only the 30-year fixed-rate jumbo loan is available for investment properties. The 15-year fixed-rate jumbo loan and ARM options are only available on primary and vacation homes.

Loan Requirements For Rocket Mortgage’s Jumbo Smart Mortgage

The minimum credit score for a 30-year fixed jumbo loan on primary residences, vacation homes and investment properties is 680. The minimum credit score for a 15-year fixed loan or a Jumbo Smart ARM is 700, although requirements may vary depending on individual circumstances.

Typically, jumbo loans require down payments of 20% or more. Our Jumbo Smart loan requires only a 10.01% down payment for a single-unit home and 15% for two-family homes.

Refinancing Your Home With A Jumbo Loan

When you refinance your home, you’re essentially paying off your current mortgage with a new mortgage. If you used a jumbo loan to purchase your home, you may need a second jumbo loan to refinance your mortgage. Or maybe now you’ve amassed enough home equity to refinance with a conforming 30-year fixed-rate mortgage.

There are many good reasons to refinance. Whatever your future plans, you can expect the jumbo loan refinance process to be very similar to the initial mortgage application process. You might also have accumulated enough equity in your home to refinance into a conforming fixed rate mortgage.

Jumbo Loan Rates

Because there’s greater risk involved in lending large amounts of money, jumbo loans traditionally have offered higher interest rates than conforming loans. Nowadays, however, jumbo loan rates approach the conforming loan rates offered by most lenders.

With home prices constantly rising, jumbo mortgages are far more commonplace than they once were. As a result, the gap between the average 30-year fixed-rate conforming loan rate versus a 30-year fixed-rate jumbo loan rate is closing. Some jumbo mortgage rates are in line with or even lower than conforming loan rates.

Keep in mind that jumbo loan rates can vary dramatically, however, depending on your lender, credit score and down payment.

VA Jumbo Loans

Veterans or active members of the U.S. military can qualify for VA jumbo loans if they’re interested in purchasing homes that exceed the standard loan limits of their area. If your Certificate of Eligibility (COE) indicates that you have full eligibility, you have access to a loan amount limited only by your income, credit score and DTI.

However, if you have only a remaining entitlement, you may face VA loan limits based on the county in which the property is located.

To qualify for these higher loans, borrowers must have a minimum score of 640 and may need to make a down payment with a credit score of 740.

Jumbo Mortgage Loan FAQs

Learn more about jumbo loans with the answers to these frequently asked questions.

Is it harder to get a jumbo loan?

Not necessarily. These once-exotic loans are now commonplace, given the sharp increases in home prices over the past few years. Of course, lenders are risk-averse, so they will take a closer look at your application.

Can you use a jumbo loan for the purchase of land?

Whether you’re purchasing or refinancing, you may use a jumbo loan for a home on up to 20 acres of land. However, the land can’t be zoned for agricultural use.

Do you have to put 20% down on a jumbo loan?

No, not anymore, although at one time 20% was considered the preferred down payment for a jumbo loan. As these loans have become more routinely needed, lenders have become less hesitant to make them. For example, our colleagues at Rocket Mortgage offer Jumbo Smart loans of up to $3 million starting at only 10.01% down.

Each lender is different, so you’ll have to ascertain their credit requirements.

The Bottom Line: Jumbo Loans Help You Buy A Home In The Most Expensive Real Estate Markets

A jumbo loan can be the solution you need to pay for that perfect home in your very expensive neck of the woods. Or it can be the ticket into the home of your dreams.

Ready to start your Jumbo Smart home loan application? Apply online today.