Jumbo Mortgage Loans

Table of contents

• What is a jumbo loan?
• Conforming loans vs. non-conforming loan
• What is the jumbo loan limit?
• Jumbo loan requirements and qualifications
• Jumbo mortgage rates vs. conforming mortgage rates
• Jumbo mortgage types
• How to find the right jumbo mortgage rate

What is a jumbo loan?

Taking out a mortgage is a great way to build wealth and invest in your future, but there are some limits to the amount you can borrow. If you try to finance the purchase of a $1 million home, for example, you’ll quickly find out that conforming mortgages won’t apply. In order to achieve those homeownership dreams, you might have to apply for a jumbo loan.

For typical home loans to be approved, the amount of financing cannot exceed the loan limits set by the Federal Housing Finance Agency. These limits are put in place to create liquidity and stability in the housing market and make mortgages available to a wider range of borrowers. As of 2022, the FHFA mortgage limit is $647,200.

When a borrower’s mortgage surpasses the FHFA’s caps, perhaps for a $1 million home, the standard mortgage structure no longer applies. These home loans are known as non-conforming jumbo mortgages and are usually taken out to finance the purchase of a larger home.

The credit risk taken on by lenders who issue jumbo loans, in addition to the sheer amount of financing provided, means the threshold for approval is higher than conforming loans. Among other conditions, securing a jumbo loan typically requires an excellent credit score, few ongoing debts and lots of money in the bank.

For a standard home loan, lenders can benefit from the security provided by the U.S. government. Organizations like Fannie Mae reduce some of the risk associated with lending, as well as offer the ability to resell loans on the secondary market. These quasi government guarantees help stabilize the real estate market, keep the cost of borrowing money low and work to maintain a healthy economy.

These protections fall away when a loan is designated as “non-conforming.” This distinction fundamentally changes the way lenders view mortgage applications and carries heavy implications throughout the mortgage process.

Conforming loans vs. non-conforming loans

Basically, conforming loans adhere to the FHFA’s loan limits and underwriting guidelines established by Fannie Mae and Freddie Mac and non-conforming loans do not. These organizations help provide the security of a secondary market, where lenders can package the loans and sell them to another institution.

When issuing a non-conforming loan, lenders are closed off from this secondary market. This difference has major implications throughout the approval process. The added risk taken on by lenders is reflected in the rigorous underwriting process and higher closing costs associated with this type of lending. As we’ll get into below, mortgages require significantly more attention to detail when they surpass the conforming loan limit.

What is the jumbo loan limit?

The conforming loan limit is the point where the mortgage amount tops the cap set by the FHFA, otherwise known as the conforming loan limit.

The conforming loan limit puts a cap on the size of a mortgage that can be purchased or guaranteed by Fannie Mae or Freddie Mac. These organizations allow lenders to fund mortgages with reduced risk by backing up a portion of home loans that follow an approved set of guidelines. Mortgages that are structured to meet these guidelines are known as conforming loans, while those that stray from the requirements are non-conforming.

According to FHFA.gov, the conforming loan limit for 2022 is $647,200, which saw an increase from 2021’s limit of $548,250. While this establishes a baseline loan limit for the nation, individual counties may have varied caps based on local real-estate market differences. An expensive neighborhood in Malibu, for example, might have a higher limit than the national limit because of the high average sales price of nearby homes.

Whatever the conforming loan limit is for your specific area, any mortgage that exceeds that number will be a non-conforming loan.

Jumbo loan requirements & qualifications

Conventional home loans, such as 30-year fixed mortgages, come with strict requirements that borrowers must follow in order to be approved. On non-conforming mortgages, such as a jumbo loan, that scrutiny can be even more intense. Since these mortgages can’t be backed by the government, lenders take on considerably more risk when approving a loan.

In addition, jumbo loans are truly “jumbo.” The large amount of financing provided by lenders for these mortgages makes conventional home loans seem small by comparison. As a result, the expenses associated with closing the loan will be higher.

Jumbo mortgages also can’t be backed by the government or sold on the secondary market like conforming loans, so expect your lender to set stringent requirements and a rigorous underwriting process in order for the loan to go through.

Let’s take a closer look at jumbo loan requirements and qualifications, so you can be prepared when it’s time to apply.

• Credit score
• Debt-to-income ratio
• Cash on hand
• Documentation & underwriting

Credit score

On a conventional loan, lenders typically look for a credit score of at least 670 to approve a mortgage without added provisions. Since jumbo loans carry significantly more risk for lenders, that credit threshold is much higher. For loans valued up to $1 million, you’ll usually need a credit score of at least 700 to qualify. Borrowing more than that means the credit requirement will rise as well. On a larger mortgage, the minimum credit score could be as high as 740.

Even if your score is adequate for approval, it’s a good idea to get it as high as possible before applying for a jumbo loan. Interest payments are calculated as a percentage of the loan’s overall balance, so any points added to your jumbo loan will have a greater impact than on a conventional mortgage.

A perfect credit score could give you the negotiating power to get a lower interest rate which could help you save on your monthly payments*.

Debt-to-income ratio

You might have the credit or cash on hand to afford a jumbo mortgage, but your lender will need to verify that those funds aren’t already tied up somewhere else.

Debt-to-income ratio, or DTI, is the percentage of your total income that is already committed to ongoing debts. Car payments, student loans, hospital bills and credit card debt all contribute to your DTI, which is calculated by dividing the total of your ongoing monthly payments by the amount you earn before deductions.

For example, if you make $5,000 a month and pay $2,000 in monthly bills, your DTI would be 40%. A low DTI is essential for jumbo mortgage approval, as your lender will be confident you can keep up with the steep monthly payments.

The industry standard on conforming loans requires a DTI of 50% or less. On a non-conforming jumbo mortgage, your lender might expect a DTI of 40% or less. These requirements could be offset by making a higher down payment or strengthening your credit before you apply.

Cash on hand

For a lender to feel confident in your ability to keep up with monthly bills, they might want to confirm that you have enough liquidity to cover a full year’s worth of payments.

Money in the bank isn’t the only way to meet these requirements. Some lenders might allow a percentage of your retirement savings or business funds to go toward meeting this condition.

In addition to proving you have the cash on hand to manage monthly payments, you’ll also need a significant amount to cover the down payment.

Jumbo loan down payment

Jumbo loans might allow you to borrow more than you would with a traditional loan, but you’ll still need a good chunk of change to cover the down payment.

Committing to a purchase with a down payment of 20% or more also helps avoid the cost of private mortgage insurance. On a jumbo mortgage, that expense could amount to over $1,000 added to your monthly mortgage payment.

However, every lender won’t require 20% down for a jumbo loan. Depending on local market conditions and your own financial background, some lenders could offer jumbo loans for less than 20% down without the need for PMI.

Documentation & underwriting

Securing a non-conforming mortgage demands a bit more attention to paperwork and underwriting than a standard loan. You may need to submit extra documentation such as complete tax returns, bank statements and information on investment accounts you hold.

A jumbo mortgage, or any other non-conforming loan, will have varying approval standards between lenders. While conforming loans can work with the underwriting guidelines set by Fannie Mae and Freddie Mac, non-conforming loans cannot. Without a uniform template to reference, jumbo loans need to be manually underwritten.

This involves a more thorough (and more expensive) review of all the documentation that was submitted for the application. Any previous financial missteps, such as bankruptcy or foreclosure, are likely to be revealed and scrutinized during this step.

Jumbo mortgage rates vs. conforming mortgage rates

30-year jumbo mortgage rates are typically around the same rate as their conventional loan counterparts, but historically this wasn’t always the case. Prior to the 2008 financial crisis, jumbo loans would come with a higher baseline interest rate than conforming mortgages. When the market for larger homes dried up, lenders started mirroring rates attached to standard home loans.

Just like any other mortgage, the interest rate applied to a jumbo loan will also be impacted by the borrower’s credit score. Some lenders may allow a credit score deficit to be offset by other factors, such as a higher income or assets that can be used as collateral.

Although non-conforming mortgages can’t be guaranteed by the government, they can be securitized by independent financial institutions. This also helps keep jumbo mortgage rates relatively low by giving lenders a means to unload some of the added risk associated with this type of financing.

While the rates might not differ much between the two types of loans, it’s important to remember your interest payments are proportional to the amount you borrow. On a jumbo mortgage, the expense will be much higher.

For more information on conforming mortgages and the benefits they offer, take a look at the other lending structures that can help you buy a home:

• 30-year fixed conforming mortgage
• 15-year fixed conforming mortgage
• FHA conforming mortgage
• VA conforming mortgage

Jumbo mortgage types

Jumbo mortgages are available in both fixed and adjustable rate structures. Depending on your own financial situation and the state of your target housing market, you might prefer one lending structure over another.

Adjustable rate mortgages

An adjustable rate mortgage, or ARM, guarantees a fixed interest rate for an established number of years, with periodic rate adjustments when the fixed term is up**.

Buyers who plan on staying in their new home for only a few years might prefer the benefits provided by the adjustable rate structure:

• Jumbo 5-year ARM non-conforming mortgage
• Jumbo 7-year ARM non-conforming mortgage
• Jumbo 10-year ARM non-conforming mortgage

Fixed rate mortgages

If you’re looking to move into your new home for the long term, a fixed-rate mortgage might be the loan type you’re looking for. This type of financing features an unchanging interest rate for the full duration of the loan.

Here’s a look at some fixed-rate lending options and how they can benefit your homeownership goals:

• Jumbo 10-year fixed non-conforming mortgage
• Jumbo 15-year fixed non-conforming mortgage
• Jumbo 20-year non-fixed conforming mortgage
• Jumbo 30-year non-fixed conforming mortgage

How to find the right jumbo mortgage rate

Before you apply for a mortgage, be sure to meet with mortgage professionals that can help you decide if a non-conforming jumbo loan is the best fit for you. That way, you’ll be able to find a great deal, as well as the financing structure that fits your needs.

If you’re aiming for a jumbo loan, keep the additional documentation and liquidity requirements in mind and how they might extend the approval and underwriting timeline. With organized documentation and a solid mortgage plan in place, you’re ready to begin your home buying journey.