What Is a Jumbo Loan?

Put simply, a jumbo loan is a conventional loan for more money than is allowed for a conforming loan. You’ll only need a jumbo loan if you’re buying a home that’s more expensive, or one that’s located in an expensive market.

Most conventional loans offered by private lenders are conforming loans, which means they conform to a maximum loan amount set each year by the Federal Housing Finance Agency. Mortgage lenders can sell conforming loans to government-sponsored enterprises Fannie Mae and Freddie Mac. That frees up money for the lender to make more loans for more homes. 

What’s the difference? When a loan exceeds the conforming limit, it means the lender can’t sell the mortgage to Fannie or Freddie. These mortgages are called nonconforming or jumbo loans. 

How Much Is a Jumbo Loan?

The FHFA sets two limits for conforming loans:

• In 2023, the standard limit for one-unit properties is $726,200 — an increase of $79,000 from the previous year.
• The other limit is for counties where 115% of the local median home value exceeds the conforming loan limit. It also applies to properties in Alaska, Hawaii, Guam, and the U.S. Virgin Islands. In 2023, that amount is $1,089,300.

You can use this map of conforming loan limits by county to look up which counties qualify for the higher loan limit. If you need to borrow more than the loan limit for your home’s location, then you’ll have to get a jumbo loan.

How Do Jumbo Loans Work?

Applying for a jumbo loan is not too different from applying for a conforming loan. However, jumbo loans tend to have stricter requirements. Because you’re borrowing more money, the lender will have higher expectations for your financial qualifications.

Here are some of the differences you can expect with a jumbo loan:

• A larger down payment. Lenders often require you to make a larger down payment with a jumbo loan. Don’t be surprised if you need to put down at least 20% to get approved.
• Larger monthly payments. A larger loan comes with larger monthly payments. You want to be sure you can afford to make the payment every month.
• More income and cash reserves. You may need to make more money — and have more saved up — to show the lender that you can afford a jumbo loan.
• Higher credit score. Because a jumbo loan is riskier for the lender, your credit score may need to be above average to get approved.
• Lower debt-to-income ratio. Lenders use your DTI ratio to help them decide if you can afford the loan. You calculate your DTI ratio by adding up all your monthly debt payments and dividing that by your gross monthly income. Typically, lenders want your DTI ratio to be 43% or lower to get a loan.
• Lower loan-to-value ratio. Your LTV ratio compares how much the property is worth with how much you need to borrow. You calculate your LTV ratio by taking your total mortgage amount and dividing it by the purchase price. To get a jumbo loan, you may need an LTV ratio of 80% or lower.
• Higher closing costs. Jumbo loans have higher closing costs than conforming loans. With a larger mortgage, the lender wants to be that much more thorough in documenting the transaction and determining your eligibility.
• Limited mortgage interest deduction. Typically, homeowners with conventional loans can deduct mortgage interest on the first $750,000 they owe on their taxes. If you have a jumbo loan that exceeds this limit, you probably won’t get a significant tax break.

Pros and Cons of a Jumbo Loan 

Here’s a look at some of the different benefits and drawbacks of jumbo loans:

Who Are Jumbo Loans For?

You need a jumbo loan when you have to borrow more than the conforming loan limit to buy a house. That happens when the home is on the expensive side, or located in a market where prices are high. Whether you’re shooting for a big, sprawling house or a more modest home in a desirable and expensive neighborhood, a jumbo loan could be the way you make it yours.

Just keep in mind that jumbo loans have stricter eligibility requirements compared to conforming loans. As a result, you’ll face more financial scrutiny to qualify. You’ll have to put more money down, pay higher closing costs, and have a higher credit score. That’s why jumbo loans are more suitable for homebuyers who have a stronger financial foundation.

VA jumbo loans

The Department of Veterans Affairs offers the only government-backed jumbo loan program to eligible service members. Credit score requirements for a VA jumbo loan vary by lender, but qualified veterans should expect to have a credit score of 620 or higher. There’s no limit to how much a veteran with full entitlement can take out, though lenders may set their own restrictions.

Keep in mind that the VA funding fee is a percentage of the total loan amount. You can expect the fee to be larger for a jumbo loan due to the bigger amount.

Jumbo Loan FAQ 

Here are the answers to a couple of frequently asked questions about jumbo loans.

Can you refinance a jumbo loan?

Yes, you can refinance a jumbo loan, if qualified — but the process may be more complicated. Because jumbo loans are larger than conforming loans, they pose a greater risk to the lender. You can expect the requirements to be stricter, the closing costs to be higher, and the underwriting process to be longer.

Are jumbo loans harder to qualify for?

Yes, jumbo loans come with stricter eligibility requirements, though the specifics can vary depending on the lender. You’ll typically need a higher credit score and a lower DTI ratio than for a conforming loan. Many lenders also require a minimum down payment of 20% for borrowers to get a jumbo loan.