What is a Jumbo Loan? 8 Things Homebuyers Should Know
Posted by Gary Ashton on Thursday, June 20th, 2024 at 9:47am.

For homebuyers seeking a luxury home, jumbo mortgages are the easiest way to borrow a lot of money for a property. On the other hand, jumbo loans create greater risk for the lender—and for you. Because of this additional risk, qualifying for a jumbo loan can be a challenge. Knowing what a jumbo mortgage is, what it takes to qualify for a jumbo mortgage, and what kind of risk is involved can help you decide if a jumbo loan is right for you.
For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.
What Is a Jumbo Loan?
A jumbo mortgage is a mortgage that is higher than the conforming loan limit. This limit varies based on location, with some high-cost areas having higher conforming loan limits, and the loan limit is reevaluated every year by the Federal Housing Finance Agency (FHFA).
Because these are non-conforming loans, they can't be bought by Fannie Mae and Freddie Mac and thus can't be guaranteed by these government-backed entities. This presents a greater risk to the mortgage lender, as selling the mortgage on the secondary mortgage market is more difficult.
Jumbo loans are usually used to acquire luxury properties, including both primary residences and vacation homes. Sometimes, these mortgages are used to purchase an investment property. In some expensive home markets, jumbo loans are required to purchase more modest homes simply because the cost of housing in those areas is so high.
How Do Jumbo Loans Work?
For the borrower, jumbo loans work much the same as a regular loan would. The lender will work with the borrower to make sure they are a good candidate for the loan. Since the loan is for a higher dollar amount, the requirements to qualify may be a bit more challenging.
One thing to consider is that jumbo loans require more effort and more risk from lenders. Therefore, unless the lender is working in a housing market where nearly every loan is a jumbo loan (such as in some places in New York or Southern California), it is important to make sure the lender has experience in these loans. The lender will often have a requirement for private mortgage insurance (PMI).
After the application process is complete and the loan is offered, paying the mortgage is the same as for any other loan—just with a higher payment.
Jumbo Loan Requirements
One upside to using a non-conforming mortgage loan is that lenders aren't beholden to Fannie Mae and Freddie Mac's borrower requirements. Lenders have more flexibility with what credit scores, down payments, and debt-to-income ratios they're willing to accept. That said, jumbo loans are inherently higher-risk loans, so lenders will often have even stricter requirements than conventional loans.
Jumbo loan requirements vary from lender to lender, but some common requirements include:
- A credit score of 680 or higher; many lenders require 700+
- A down payment between 10% and 30%
- A max DTI of 38% to 43%
- 6–18 months' worth of mortgage payments in cash reserves
- Additional income documentation and tax returns
- Sometimes, a second home appraisal
If you're buying a home worth more than $1.5 million, some jumbo mortgage lenders may require up to a 40% down payment—and if you're a first-time homebuyer, that number may climb even higher.
Some factors can be offset by others. For example, if you have high cash reserves and a great credit score, a lender may be willing to overlook a higher DTI ratio.
Jumbo loans frequently require manual underwriting, so expect the process to take more time, require more paperwork, and involve more back-and-forth communication.
And, keep in mind, jumbo loan amounts and requirements vary depending on the type of property you're buying and what you're trying to do with your mortgage. Buying an investment property typically has much stricter requirements than buying a primary residence, for example, and the conforming loan limits are higher for multi-unit properties than single family homes.
Pros and Cons of Jumbo Loans
What Are the Benefits of a Jumbo Loan?
A jumbo loan is a good way for a homeowner to access large sums of money to purchase a property. For many homeowners, the alternative to borrowing a jumbo loan is to take out two or three mortgages. By comparison, a jumbo loan is easier to manage, since it's a single payment.
Because of lender flexibility with jumbo loans, shopping around could allow you to find interest rates comparable to standard mortgages, jumbo loan down payments of less than 20%, waived PMI requirements, and other features.
What Are the Disadvantages of a Jumbo Loan?
Jumbo loan rates are typically higher than conforming loans—usually between 0.25% and 1% higher. This is because jumbo loans involve more risk for the lender, and higher interest rates help offset the risk of losing money to a loan default. With the higher amount you're borrowing, this small difference in rates can add up quickly.
The larger loan principal also means you'll pay much more in closing costs since that's calculated as a percentage of the loan amount.
In general, jumbo loans are harder to refinance, and because the loan is so large, fluctuations in the market are more likely to reduce equity and put the homeowner underwater.
How Do Jumbo Loans Compare to Standard Loans?
Standard mortgages vary in their requirements, so it's hard to compare jumbo loans to all other mortgages. However, in general, jumbo loans require the home buyer to put more money down, have more money on hand, and have a better credit rating than standard mortgages.
For example, an FHA loan requires the home buyer to put down 3.5% of the purchase price of the home. Home buyers with a credit score as low as 500 points can qualify for an FHA loan.
Home buyers who borrow a jumbo loan often must put down at least 20% of the purchase price of the home. They must also have at least six months of mortgage payments in their savings account and often must have a credit score of at least 700 points.
VA and FHA Jumbo Loans
As counterintuitive as it might seem since these loans often target first-time homebuyers, VA jumbo loans and FHA jumbo loans do exist. However, they have different requirements than their standard counterparts.
FHA jumbo loans allow you to get a jumbo loan with 3.5% down if you qualify and often have lower interest rates than typical jumbo loan rates if you have good credit. However, the FHA requires borrowers to pay a Mortgage Insurance Premium (which is like PMI but doesn't necessarily go away when you reach 20% equity). In addition, some lenders have stricter credit score requirements than the FHA's set minimum, though it may be more flexible than with a traditional jumbo loan.
VA jumbo loans can still achieve the famous 0% down payment. Interestingly, the VA doesn't actually have a set maximum—the VA loan limits are in place to determine how much a veteran or active service member can borrow without their full entitlement before needing to put money down. If the borrower has full entitlement, they can borrow as much as a given lender's risk tolerance will allow and still be able to buy a house with no money down. Credit and income requirements may still be more stringent than a conforming VA loan, and rates may be higher, but this varies by lender. As with FHA jumbo loans, VA jumbo loan requirements are often much more lenient than other jumbo loans.
What Type of Buyer Should Consider a Jumbo Loan?
Jumbo loans are best for home buyers who have a solid financial history, an excellent credit rating, a stable income, and a lot of financial responsibility. In general, lenders are able to determine which borrowers are right for a jumbo loan by looking at their bank statements, work history, and credit history.
Ready to Contact Your Lender?
If you're a homeowner who would like to purchase a luxury or high-priced property, you may need a jumbo loan to make your purchase. To find out whether or not a jumbo loan is right for you, contact a knowledgeable lender for more information.
For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.
Gary Ashton
The Ashton Real Estate Group of RE/MAX Advantage
The #1 RE/MAX team in the World!