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Jumbo Mortgages: A Guide to How These Home Loans Work
A jumbo mortgage could help make your dream home a reality.
Home prices are on the rise, with the average price of a home in the United States hitting $495,100 at the end of Q2 2023.1 For those wanting a more luxurious home or needing one on acreage, you could expect to pay significantly more.
Unfortunately, traditional mortgage options may not give you access to enough money to finance the purchase of a pricier home. That’s where jumbo mortgages come into play. These loans have significantly higher borrowing limits than other types of mortgages, making it easier for qualified borrowers to buy the home of their dreams.
Let’s take a look at how these loans work and how you can decide if a jumbo loan is right for your situation.
Key Takeaways
Jumbo loans are mortgages that help borrowers buy homes that exceed the Federal Housing Finance Agency’s loan price limits for traditional mortgages.
These loans often have more strict qualification requirements than other loan types.
Not all lenders offer jumbo loans, and those who do may charge higher rates to offset the risks of issuing these loans.
What Is a Jumbo Mortgage Loan?
A jumbo mortgage is a type of home loan that allows borrowers to finance the purchase of a higher priced home that may not qualify for conventional financing.
Conventional mortgages typically have limits in place that restrict how much you’re able to borrow, set by the Federal Housing Finance Agency (FHFA). While the limits are adjusted year to year to account for inflation, they may make it hard to buy certain properties with a traditional mortgage.
How Jumbo Loans Differ from Traditional Mortgages
Most traditional mortgages are considered conforming loans, meaning they conform to the borrowing limits set by the FHFA. As conforming mortgages, these loans can only be used to purchase properties priced below the FHFA’s maximum limit.
As of 2024, the current conforming loan limit is $766,550.2 While this number is higher than the average price of a home in the U.S., it may not be high enough to accommodate all home buyers in all parts of the country. Jumbo loans let you borrow more than the conforming loan limit, potentially making it easier to get into the home of your dreams.
Borrowing Requirements for Jumbo Loans
The more money you’re borrowing, the riskier the loan is for lenders. Since jumbo mortgages have higher borrowing limits, these lenders typically impose stricter requirements on borrowers, and these loans tend to have higher rates than conforming loans.
Since every lender is different, it’s important to review their specific requirement. However, you are likely to see requirements similar to the following.3
Minimum credit score of 700: A higher credit score may help lenders feel more confident in you as a borrower. For jumbo mortgages, lenders typically prefer scores of at least 700, and the higher your score is, the more favorably they may view your application. That said, each lender may set their own credit score requirements, and some may want to see a significantly higher number than others.
Low debt-to-income (DTI) ratios: To qualify for a jumbo mortgage, most lenders prefer to see a
debt-to-income ratio of 45% or less. If you’re applying for a jumbo mortgage, consider working on paying off your debt to lower your DTI before applying.
Significant savings: Most lenders who offer jumbo mortgages expect borrowers to have savings to hedge against potential missed payments. The exact amount varies from lender to lender, but some require borrowers to have as much as one year’s worth of mortgage payments in the bank.
Sizeable down payment: Jumbo loans often require a minimum down payment of at least 10% of the home’s purchase price. For example, if you’re buying an $800,000 property, that means you need to have at least $80,000 in cash to use as a down payment when you apply. Some lenders may require a larger down payment, potentially more than 20% of the home’s price.
If you’re interested in applying for a jumbo loan, be sure to research several lenders and understand their requirements thoroughly first.
The Pros and Cons of Jumbo Loans
Jumbo mortgages may help you buy a more expensive home, but they’re not the solution for everyone. Before you apply, familiarize yourself with the pros and cons of using this type of loan.
The Benefits of Jumbo Loans
Jumbo loans have a few benefits beyond helping you finance a home that exceeds conforming loan limits, including4:
Often have fixed rates. Like conventional mortgages, jumbo loans often have fixed rates. This means that your monthly loan payments stay the same over the life of the loan, a benefit that could make it easier to budget for your expenses.
Additional home options. In some major metropolitan areas of the country, average home prices exceed conforming loan limits. Since jumbo loans let you finance the purchase of homes that exceed those limits, these loans may be the only financing option available.
Flexibility in the property type. Jumbo mortgages may be used to purchase single family homes, duplexes, multi-family properties, and even investment properties.
The Downsides of Jumbo Loans
There are a few downsides of using a jumbo home loan to purchase a home, including:
Higher rates. Lenders understand that jumbo loans are often riskier—with a large debt, a buyer may be more likely to default before the end of the loan’s term. Lenders often hedge against that risk by charging a higher rate than they would with a conventional or conforming loan.
Difficult qualification requirements. Jumbo loan lenders prefer to issue loans to well-qualified borrowers, and they typically have strict qualification requirements in place. If you don’t have good credit or enough saved up toward the purchase of your new home, you may struggle to qualify for this size loan.
Locks money into your home: Even if you have savings to cover the down payment, additional cash reserves, and the ability to pay the monthly payment, having a jumbo loan could still be a bad fit for your finances. A large home and mortgage could make you house poor, meaning that a large portion of your wealth and liquidity would be tied up in a house. In addition, a large monthly house payment may make it harder for you to put money toward your investments or your savings.
Final Thoughts
Buying a home with a jumbo mortgage may make it easier to buy a higher-priced home. But doing so could take a toll on your financial wellness. Before you commit to the idea of buying an expensive home, make sure your savings and your finances are in good shape.
Not sure where to start? Check out our guide on how to track your current expenses and debts. Getting control of your money could help you get on the path to buying the home of your dreams.