Complete Guide to Jumbo Mortgages

Banner image
ByChristopher Boston
Reviewed byTimothy Manni
Contribution by1 expert
fact checked icon
ByChristopher Boston
fact checked icon
Reviewed byTimothy Manni
Contribution by1 expert
fact checked icon

Updated: November 17, 2023

Advertising & Editorial Disclosure

A mortgage is like a stepping stone for buying a home. They let you borrow money from a lender to make that big purchase. But what if the home you're eyeing is more expensive than what a standard mortgage can cover? Enter jumbo loans, designed for properties that exceed typical lending limits. Knowing the details of jumbo loans, including rates and requirements, allows you to make more informed decisions. This way, you can secure the right loan for your dream home without any future surprises.

What Is a Jumbo Loan?

A jumbo loan is a mortgage that exceeds the typical lending limits set by federal agencies. Unlike conforming mortgages, jumbo loans allow you to borrow more money to buy more expensive properties. Say you're eyeing a luxury home or want to live in an area with a high cost of living — jumbo loans can be your go-to option.

But it's not just about getting more money — there are specifics you should know. From different interest rates to stricter requirements, jumbo loans come with their own set of rules. Understanding these nuances ensures you're making a decision that fits your financial picture.

Comparing Jumbo Loans and Conforming Loans

Conforming loans are mortgages that meet specific guidelines set by federal agencies like Fannie Mae and Freddie Mac, making them eligible for government backing. Most people who get a mortgage opt for a conforming loan. You might think applying for a jumbo mortgage will be a similar experience, but they're different in key ways. Understanding these differences can work to your advantage, especially when you're deciding which type of loan best suits your needs. Here's a comparison table to help you navigate those differences:

Comparison Area
Conforming Loans
Jumbo Loans

Loan Amounts

Up to set limits

Exceed set limits

Mortgage Rates

Generally lower

Generally higher

Requirements

Standard

More stringent

Income

Stable

Higher income needed

Credit Score

Around 620+

Usually 700+

Understanding these differences is crucial when you're exploring your financing options. Knowing what sets them apart can better align your choice with your financial situation and property goals. Whether it's conforming or jumbo, the right loan can make all the difference in your homebuying journey.

How Jumbo Loans Work

Understanding how jumbo loans work can help give you a leg up in the homebuying process. For starters, jumbo mortgages usually have different rates and stricter requirements. Knowing this helps you prepare, whether it's saving up for a bigger down payment or working on improving your credit score. Time matters, too. The application-to-closing timeline for a jumbo loan can be longer due to additional checks and documentation. This means you'll need to plan more carefully.

These are just a few factors to consider. The better you understand these elements, the better you can navigate the jumbo loan process, ensuring you get the best deal for your dream property.

Loan Limits

Understanding loan limits is crucial because it's the main factor that separates jumbo loans from conforming loans. The Federal Housing Finance Agency sets these limits, currently at $726,200 for most states and up to $1,089,300 in high-cost areas like San Francisco and New York City.

These limits can change, affecting how much you can borrow without entering the jumbo loan territory. If you're eyeing a property that's priced above them, you'll need a jumbo loan. Knowing these limits can help you figure out what kind of loan you need and how it'll impact your finances.

Understanding Jumbo Mortgage Rates

Knowing about jumbo mortgage rates is important if you're considering this loan type. Jumbo rates can be higher than conforming rates, but that's not always the case. While higher loan amounts increase the risk for lenders, they tend to balance that risk with stricter requirements when it comes to credit scores, down payments and cash reserves. Shopping around for more competitive figures can save you thousands over the life of the loan. Check different lenders, compare offers and don't be shy to negotiate.

Jumbo mortgage rates also come in two main structures: fixed and variable. Fixed rates stay the same, making budgeting easier. Variable rates can change, offering lower initial payments but the risk of higher costs down the road.

Current jumbo mortgage rates can fluctuate due to factors like economic conditions and lender policies. You can time your loan application to lock in the best rates by staying updated on these changes. Understanding jumbo mortgage rates helps you pick the right loan and puts you in a better position to negotiate better terms.

Manual Underwriting for Jumbo Loans

Manual underwriting is when a human underwriter evaluates your loan application instead of using automated software. For jumbo loans, manual underwriting is often necessary because these loans are riskier for lenders. Underwriters look closely at your financials, like income, credit score and debt, to decide if you're a good bet.

This process can lengthen your loan's timeline, so be prepared for that extra wait. While it doesn't usually cost more, it does mean that every detail of your financial life will be scrutinized. So, if you're considering a jumbo loan, ensure you’re financially in good shape.

Pros and Cons of Jumbo Loans

Understanding both the benefits and drawbacks of jumbo loans is crucial for making smarter financial decisions. On the plus side, jumbo loans allow you to buy a higher-priced home and may offer more flexible terms. But focusing only on these positives can lead to problems. For example, if you don't consider the higher interest rates, you might have unmanageable monthly payments. Ignoring the stricter lending requirements could mean a denied application, costing you time and money.

To get a more balanced view of jumbo loans, here are some pros and cons to consider:

Pros and Cons

plusSign icon

PROS

  • Buy a High-Priced Home: With jumbo loans, you're not confined by the typical loan limits, allowing you to buy in a higher price range.
  • Flexible Terms: These loans often come with the choice between a fixed-rate or adjustable-rate mortgage, giving you some flexibility based on your financial outlook.
  • Potential for No PMI: Some jumbo loan programs offer options without Private Mortgage Insurance, saving you money each month.
minusSign icon

CONS

  • Higher Interest Rates: Jumbo loans can come with higher interest rates, which only add to the costs of a higher-priced loan.
  • Stricter Requirements: Lenders typically require a minimum credit score of 700 and a debt-to-income ratio of 36% or lower, with 43% as the maximum.
  • Larger Down Payment: You'll need to pay at least 20% down for some jumbo loans, which can be a significant sum for high-value homes.
  • Manual Underwriting: It can extend your timeline by weeks and require more in-depth financial scrutiny.

Understanding the nuances of a jumbo mortgage can help you determine whether it's the right option. Take into account not just the benefits but also the potential drawbacks to make a well-informed decision.

Jumbo Loan Requirements

Jumbo mortgages often have stricter requirements than conventional loans, which might allow down payments as low as 3%. This is because lenders see jumbo loans as riskier due to the larger loan amounts involved, so they typically require a minimum down payment of 20%. However, some lenders, recognizing that jumbo borrowers often have substantial incomes, manageable debt and excellent credit, may accept as little as 10% down.

Knowing these requirements in advance can help you prepare. If you understand what's expected, you can take steps to meet or exceed these criteria, increasing your chances of approval. Here’s what you need to prepare for when considering jumbo mortgages:

    money icon

    Income

    Lenders want to see a stable, high income to ensure you can handle the monthly payments. Maintain a stable job with a salary that comfortably covers your projected payments.

    fairCredit icon

    Credit Score

    A high credit score is usually required — often 700 or above. It shows lenders you're responsible with credit. Check your score early and work on improving it if needed.

    bigHouseRent icon

    Down Payment

    Plan to put down about 20% of the home's price. It shows lenders you're serious and decreases their risk. Start saving early to meet this criterion.

    cashCard icon

    Debt-To-Income Ratio

    Lenders generally prefer a low DTI, which indicates that your existing debts are modest compared to your income. While a DTI under 36% is often favored, a maximum threshold of 43% is sometimes acceptable. Reducing other debts, like credit cards, can enhance your DTI and improve eligibility.

    coins icon

    Cash Reserves

    Lenders may want to see that you have enough cash reserves to cover several months of mortgage payments. Keep your savings account healthy to meet this requirement.

    housePapers icon

    Appraisals

    A thorough property appraisal is usually necessary for jumbo loans. Make sure the property you're interested in is worth the price you're willing to pay, as a lower appraisal could derail your loan approval.

Understanding the specific requirements of a jumbo mortgage can give you an edge in the approval process. Being prepared helps you meet lender expectations and helps you secure a loan that suits your needs.

Securing a Jumbo Loan

Knowing the end-to-end process of applying for a jumbo mortgage can be a game-changer. First, it allows you to gather all necessary documents and meet requirements ahead of time, which can speed up the approval process. Second, understanding each step helps you ask the right questions and make informed decisions, giving you greater control over your financial commitments.

1
Research Lenders

Start by researching different lenders. Look for those offering competitive rates and read customer reviews to gauge the quality of their service. Feel free to contact several lenders to compare terms and conditions better.

2
Pre-Qualification and Pre-Approval

After identifying potential lenders, get both pre-qualified and pre-approved. The former estimates how much you can borrow based on your income and credit score. The latter goes a step further by requiring documentation and providing a more concrete loan amount. Gather financial documents like tax returns and pay stubs ahead of time for a quicker pre-approval process.

3
Official Application

Now, you can submit the mortgage application, which requires more detailed financial information. These include tax returns, W-2s and proof of assets. Make sure all your information is accurate to avoid delays.

4
Property Appraisal

Your chosen property will be professionally appraised to confirm its market value. Opt for an appraiser with experience in the local market for the most accurate valuation.

5
Loan Processing and Underwriting

After receiving your application and appraisal, the lender will process the information and then it goes to underwriting. They’ll scrutinize all your financial details, and the property’s worth to make a final loan decision. Stay responsive to any requests for additional information to keep the process moving smoothly.

6
Closing

Once the loan gets approved, you’ll finalize everything at the closing meeting. You’ll sign all the necessary paperwork. Review every document carefully before signing, and make sure you fully understand your obligations.

When you understand each step of the process, you're not just going through motions — you're taking control of your financial future. Being prepared can speed up the process and help you secure a loan that best suits your needs.

Expert Insight on Jumbo Mortgage Loan

  1. What are the pros and cons of jumbo loans?
  2. Do all lenders offer jumbo mortgages?
  3. How and when do you refinance a jumbo loan?
Eric Eisenberg
Eric EisenbergPresident at Expert Home Loans

Frequently Asked Questions About Jumbo Mortgages

This can be a go-to resource for those who still have questions or need more details about jumbo mortgages. We answered some commonly asked questions to provide you with deeper insights into everything from the requirements to the types of properties you can purchase.

What are considered jumbo loans?
What are jumbo loan requirements?
What is the down payment for a jumbo loan?
Are jumbo loans conventional loans?
What factors influence jumbo mortgage rates?
What are the typical jumbo loan limits?
What are cash reserves and why do they matter in jumbo loans?
What types of properties can I purchase with a jumbo loan?
Can I refinance a jumbo loan?

About Christopher Boston


Christopher Boston headshot

Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans.

Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.


sources