What Is a Jumbo Loan?

Published June 24, 2022
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If you’re getting serious about buying a home, then you may have already begun looking into mortgages, and asking yourself questions like: What type of loan do I need? How much do I need to borrow? And what makes a jumbo loan 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.

Here’s a crash course on the ins and outs of jumbo loans.

What Is a Jumbo Loan?

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. Lenders can sell conforming loans to Fannie Mae and Freddie Mac, which are government-sponsored enterprises. 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 2022, the standard limit for one-unit properties is $647,200 — an increase of $98,950 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. That amount is $970,800 in 2022.

You can look up which counties qualify for the higher loan limit by using this map of conforming loan limit values by county.

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.
  • Higher 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, your DTI ratio needs 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 conventional mortgages. With a larger loan, the lender wants to be that much more thorough in documenting the transaction and determining your eligibility.

When Do You Need a Jumbo Loan?

You need a jumbo loan when you have to borrow more than the conforming loan limit to buy a home. 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.

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