A jumbo mortgage is a home loan that exceeds conforming limits set by the Federal Housing Finance Agency. The FHFA oversees Fannie Mae and Freddie Mac, which buy and sell conforming home loans on the secondary market.
“Jumbo mortgages don’t get sold to Fannie or Freddie,” says Melissa Cohn, regional vice president of William Raveis Mortgage. “Many of them are portfolio loans, meaning banks keep them on their balance sheets.”
Because lenders tend to carry these mortgages and borrowers are more likely to default on larger balances, jumbo loans are riskier for lenders.
“Say you have a $2 million jumbo loan versus 10 conforming loans each worth $200,000,” Cohn says. “If one of those 10 conforming loans goes bad, you still have nine that are performing. If the one jumbo loan goes bad, it all goes down.”
So to reduce risk, lenders set higher qualification standards on jumbo mortgages. You’ll generally need a higher credit score, larger down payment and a lower debt-to-income, DTI, ratio to get a jumbo loan.
Conventional loans generally refer to mortgages that follow conforming guidelines, while jumbo loans exceed conforming limits.
The best mortgage for you depends on what you qualify for and the amount you need to borrow. Here are some of the major differences between jumbo and conventional mortgages:
- Loan size. In 2023, a conforming loan for a single-family property is any mortgage that’s under $726,200. In some high-cost areas, conforming loans can go up to $1,089,300. Loans that exceed these limits are considered jumbo, and each lender sets its own ceiling limit. Some may offer jumbo loans around $2 million or $3 million, while others go as high as $5 million or more.
- Qualification. To qualify for a jumbo mortgage, you’ll often need a credit score of 700 or higher and a down payment of around 10% to 20%. These are much stricter requirements than on a conforming loan, where you may qualify with a credit score of 620 and down payment of 3%. Lenders also like to see a DTI ratio of no more than 43% when you get a jumbo mortgage, versus a maximum 50% for a conforming loan.
- Cash reserve requirements. Some mortgages require borrowers to have cash reserves on hand to safeguard against unexpected financial emergencies. The exact amount you’ll need depends on the type of mortgage, the lender, your credit score and other personal factors. With jumbo loans, “requirements start at 12 months, and depending on the loan amount, it can be as high as 24 or 36 months,” Cohn says. With a conforming loan, you only need cash reserves in some cases, with a maximum requirement of 12 months.
- Underwriting. Most jumbo loans are manually underwritten, which means a professional reviews your application to decide whether you qualify for the loan. Conventional loan applications, on the other hand, are usually put through an automated underwriting system. The manual process may benefit you because you’ll have a chance to explain anything unique about your finances.
Jumbo loan interest rates are usually higher than rates on conforming loans, but they can dip below conforming rates on occasion. They vary at every financial institution.
To set jumbo loan rates, a lender first looks at the cost of funds, which is the interest rate it pays when it borrows from another bank. Then the lender adds its own margin to the cost of funds.
“When you add the cost of funds to the margin, that will give you your jumbo mortgage rate,” says Ray Rodriguez, a regional mortgage sales manager with TD Bank. “Rates vary because each bank could have a different risk appetite and profitability model. It all depends on the individual lender.”
Fixed jumbo loan terms can vary between 10 and 30 years. Some lenders offer other options, such as adjustable-rate mortgages, or ARMs. A 5/1 ARM, for instance, starts with a low interest rate for the first five years. During this time, “the mortgage walks, talks, acts and feels like a 30-year fixed rate loan,” Cohn says.
After the fixed period ends, the rate can change at set intervals for the remaining loan term. Cohn says borrowers often choose ARMs when market rates are high. They’ll typically refinance to a fixed rate later on, which provides predictable payments.
To calculate your jumbo loan interest rate, contact a lender and ask for a quote. You’ll need to provide details about your credit, income, outstanding debts, estimated loan size and down payment.
The lender can provide a rate quote and estimate your monthly payment. If you already got a rate quote, you can use a mortgage calculator to estimate your monthly payment. This can help you determine whether the jumbo loan fits into your budget.
Comparing loan rates is one of the best ways to lower your costs when buying a home. “Rates with jumbo mortgages can vary broadly from bank to bank,” Cohn says, because lenders have more wiggle room to set loan terms.
Even a small rate difference can provide significant savings especially on a high-dollar loan. Let’s say you take out a 30-year fixed-rate jumbo mortgage for $1 million and put down 20%. You’d save $134 a month with a 6.75% interest rate compared to 7%. And over the life of the loan, you’d save more than $48,000.
To compare rates, start by contacting multiple banks and credit unions, and ask these questions:
- Do you offer jumbo loans? If the financial institution doesn’t provide the type of loan you’re looking for, skip to the next lender.
- How much can I borrow? You’ll need to know if the lender’s upper jumbo limit is high enough to cover the home you want to buy.
- What rate can you give me? For a customized rate quote, you’ll need to provide details about your finances and agree to a credit check.
- Can you do better? Once you have a few offers in hand, use them to negotiate. One lender might be willing to beat the lowest rate offer, which can save you money.
A jumbo loan could be a good idea if you’re buying a high-value home and the larger monthly payments won’t strain your finances. First check the conforming loan limits for the county where you’re looking for homes. Loan limits can vary by county and the number of units in the property. You’ll need to take out a jumbo loan if the home you’re buying is priced above the conforming limit in your county.
The loan limit applies to the amount you’re borrowing – not necessarily the sale price of the home. Say the loan limit is $726,200 in your area, and you’re buying a one-unit property for $800,000. With a 20% down payment of $160,000, you’re only borrowing $640,000 from the lender.
In this scenario, you can apply for a conforming loan. It’s generally easier to qualify for a conforming loan, so this can work in your favor.
Jumbo mortgage rates are usually about 0.25 to 1 percentage point higher than rates on conforming loans. So a good jumbo mortgage rate is generally one that’s close to or better than the average conforming rate.
The best mortgage rates usually go to borrowers with excellent credit, a low DTI ratio and a large down payment. If you’re unhappy with a rate quote you received, ask the lender for guidance. Lowering your rate could be a matter of improving your credit score or increasing your down payment by a certain amount. You can also shop around with multiple banks and credit unions to find a lender that offers better rates.
The major benefit of a jumbo loan is that it can help you buy a high-priced home. The underwriting process also allows for more flexibility because jumbo loans are often manually underwritten. However, the qualification requirements are a major downside. Jumbo loans require higher credit scores, larger down payments, lower DTI ratios and more cash reserves compared to other types of mortgages. “With tighter eligibility requirements, someone might qualify for a conforming loan but not a jumbo mortgage,” Rodriguez says.
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