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- A jumbo loan is a mortgage for more than $726,200 in most parts of the US in 2023.
- You'll have to meet stricter requirements to receive a jumbo loan, including a bigger down payment.
- Jumbo mortgage rates may be lower than conforming mortgage rates in some cases.
For those who live in high-cost areas or have large homebuying budgets, a regular conforming mortgage might not cut it.
If you need an especially large loan, you'll likely need to find a mortgage lender that offers jumbo mortgages. These mortgages are a little trickier to qualify for, but they come with the benefit of larger loan amounts — often up to $2 or $3 million. Plus, jumbo mortgage rates are often on par with conforming rates.
Jumbo loan definition
A jumbo loan, also known as a nonconforming loan, is a type of conventional mortgage. Jumbo loans surpass the limits for conforming loans from the Federal Housing Finance Agency (FHFA).
The FHFA sets the limit for conforming loans annually. In 2023, the limit is $726,200 in most parts of the US. In areas with a higher cost of living, the limit goes up to a ceiling of $1,089,300.
Jumbo loans are riskier for lenders than conforming loans. They can't be backed by Fannie Mae or Freddie Mac, so lenders usually have stricter guidelines for borrowers to receive jumbo loans.
How to qualify for a jumbo loan
A jumbo loan can help you afford a higher-cost home, but there are some factors to take into consideration before you apply. Each lender has different qualifications for receiving a jumbo loan, but here are some general guidelines you can expect:
You'll usually need to put at least 10% or 20% down
Many lenders accept down payments as low as 3% for conforming loans. But for a jumbo loan, many lenders require at least 20% upfront.
Don't throw in the towel if you know you don't have 20% handy. Some lenders, such as Ally and Better Mortgage, only require 10% down. And though it's less common, you may be able to find a jumbo lender that will accept a down payment of just 5%.
You'll need a good credit score
Before lending you hundreds of thousands of dollars, lenders want to know you're financially responsible. You'll need a higher credit score to qualify for a jumbo loan than you would for a conforming loan — often at least 700, though individual lenders may have minimum score requirements that are higher or lower than this. The higher your score, the better rate you'll get.
You'll need a lower debt-to-income ratio
Your debt-to-income ratio is the monthly amount you pay toward debts divided by your gross monthly income. For example, if you spend $2,000 per month on your mortgage and student loan payments, and you earn $3,000 per month, your debt-to-income ratio is $2,000 divided by $3,000, or 66%.
Your exact required debt-to-income ratio depends on your lender. The company will likely require a lower ratio for a jumbo loan than a conforming loan. Most ask for a ratio of around 40%, give or take a couple percentage points. Typically, 45% is the highest you can go.
A lower ratio means you owe significantly less than you earn, leading lenders to believe you can afford the high payments that accompany a jumbo loan.
You may need cash reserves in the bank to prove you can cover your payments
Many lenders want to see that you have enough money in your savings to cover a few months of mortgage payments if you were to unexpectedly lose your source of income. This money is referred to as your cash reserves.
How much you'll need can vary depending on your lender and the level of risk it would be taking on with your loan, but it's generally a good idea to plan to have six to 12 months' worth of mortgage payments set aside.
This cash may need to be in a more liquid form, such as in a checking or savings account, though your lender may also include sources like retirement or brokerage accounts when calculating your reserves.
Jumbo mortgage rates
Rates across the board spiked in October, with average 30-year conventional rates nearing 8% at times and averaging 7.54% overall for the month, according to Zillow data. But they've calmed a bit in recent weeks.
Rates have generally been elevated this year, but they're expected to drop in 2024, so if you're looking to get a jumbo mortgage, you may want to hold off for a few months.
You might think that jumbo mortgage rates are always higher than conforming mortgage rates, but that's not necessarily the case. After checking with several sources and lenders, many lenders offer jumbo rates that are comparable to or even lower than conforming rates.
However, even if you're able to get a jumbo loan with a low rate, keep in mind that the more money you borrow, the larger your monthly payment and the more you'll ultimately spend on interest.
Shop around for a jumbo loan lender
If necessary, take some time to boost your credit score or save more for a down payment before starting the application process. Taking necessary steps can increase your chances of being approved for a jumbo loan and scoring a lower rate.
Finally, shop around for a lender. Some lenders will require smaller down payments or higher debt-to-income ratios than others, and some will give you a better rate. You may also go through a mortgage broker for a professional to do the research for you.