What Is a Jumbo Loan?
A jumbo loan is a mortgage designed for financing properties that exceed the conforming loan limits set by the Federal Housing Finance Agency (FHFA). These loans cater to buyers of high-value homes, often in luxury or high-cost markets. Learn how jumbo loans work, their requirements, and how they compare to conventional loans to determine if they fit your financial goals.
Jumbo loans are for people looking to buy high-end properties that go beyond standard mortgage limits. These loans are for people with deep pockets, often in high-cost of living areas where luxury homes and prime locations require big money. Whether you’re looking for a mansion, a vacation home or an investment property, jumbo loans offer financing options that match your big dreams with your big requirements.
What Is a Jumbo Loan?
A jumbo loan is for borrowers who need financing beyond the standard loan limits set by the Federal Housing Finance Agency (FHFA) each year. These loans are for buying properties in high-cost areas or luxury homes that go beyond conforming loan limits. Jumbo loans address unique housing needs in areas where the median home price is far above the national average.
Jumbo loans are available through lenders up to $3 million, $5 million or more when working with a mortgage broker. Borrowers use jumbo loans for primary residences, vacation homes and even investment properties, for larger financial needs.
Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) created to stabilize the U.S. housing market. Their main role is to buy mortgages that meet certain guidelines, known as conforming loans, from lenders. By doing so, they provide liquidity to the mortgage market, so lenders can make more loans. They then package the purchased loans into mortgage-backed securities (MBS) and sell them to investors, spreading the risk and keeping the capital flowing.
To keep risk and consistency in the housing market, Fannie Mae and Freddie Mac follow the annual conforming loan limits set by the FHFA. These limits are based on regional housing costs and define the maximum loan amount that can be purchased by the GSEs. Loans above these limits, like jumbo loans, are not part of this process. Since jumbo loans are riskier and can’t be sold to these GSEs, lenders have to hold them in their portfolio or find private investors, which means stricter underwriting and higher borrower standards.
Why Lenders Offer Jumbo Loans
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Motivations for lenders. Credit unions, banks, and private lenders offer jumbo loans to attract high-income borrowers, build long-term client relationships, and cater to the demand in high-cost housing markets. These loans are seen as a way to serve affluent customers with substantial financing needs.
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Catering to HENRYs. High Earners, Not Rich Yet (HENRYs) represent a lucrative demographic for lenders. By providing jumbo loans, lenders position themselves to offer additional wealth management services and financial products to these high-potential clients.
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Risks and portfolio loans. Jumbo loans are riskier for lenders as they are not backed by Fannie Mae or Freddie Mac, meaning lenders retain these loans in their portfolios. This allows them to maintain control over the terms but requires meticulous underwriting to mitigate the risk of borrower default.
History of Jumbo Loans
Jumbo loans were created to serve high-end property buyers in areas where home prices were skyrocketing. The programs have evolved to meet the growing demand for financing in luxury real estate markets, so buyers can buy prime properties without depleting their cash reserves.
How Are Jumbo Mortgage Rates Set
Jumbo mortgage rates are tied to Federal Reserve benchmarks and the borrower’s personal financial profile. They move in line with the Fed’s short-term interest rates. Since jumbo loans are bigger and riskier for lenders, borrowers have to meet stricter credit requirements. A higher credit score, typically above 700, and a lower debt-to-income ratio is required. Lenders also require proof of big cash reserves to mitigate the risk. Borrowers with stronger financial profiles, good credit, and low debt will get better rates.
How Jumbo Loans Work
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Jumbo loan structure. Jumbo loans work like traditional mortgages in terms of repayment schedule and overall structure. Borrowers can choose between fixed rate options which have consistent payments over the life of the loan or adjustable rate loans which start with lower rates and adjust periodically based on market conditions. Loan terms are 15 to 30 years, depending on borrower preference.
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Rate comparison. Historically, jumbo loans had higher rates than conforming loans. But the gap has narrowed. For example, as of April 2024, the average 30-year jumbo loan rate was 7.06% vs 6.93% for conforming loans. Lender-specific policies and broader market trends affect these rates.
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Lender-specific limits. The jumbo loan limit varies by lender and property location. In 2024, loans above $766,550 in most areas or $1,149,825 in high-cost-of-living areas are jumbo. Beyond that, lenders have their own limits, some up to $5 million or more.
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Jumbo loan niche. This niche includes affluent buyers seeking luxury homes, investors acquiring high-cost rental properties, or individuals purchasing homes in areas with elevated housing prices, such as California, New York, or Hawaii. Jumbo loans fill a crucial gap by offering tailored solutions for borrowers with strong financial profiles, ensuring access to funding for properties that exceed standard loan limits.
Requirements for Jumbo Loans
Credit score. A high credit score is required for jumbo loan approval, most lenders require a minimum of 700. Higher scores will get you approved and often better rates.
Debt to income ratio. Lenders have stricter DTI requirements for jumbo loans, typically 43% or lower. Conforming loans can go up to 50%.
Down payment. Standard down payment requirements for jumbo loans are 10% to 20%, but some lenders may require 25% or more for bigger loan amounts or to give better terms.
Cash reserves. Borrowers are required to show liquid assets equivalent to 6 to 12 months of mortgage payments. This gives lenders peace of mind in case of unexpected events.
Documentation. Borrowers need to provide extensive documentation, tax returns, pay stubs, bank statements, and proof of assets. Manual underwriting is common for jumbo loans, which requires a detailed review of financial history.
Who Are Good Candidates for Jumbo Loans
Jumbo loans are best for high-income earners who make between $250,000 to $500,000 a year but don’t have the liquid cash to buy a high-value property outright. These individuals are often referred to as HENRYs (High Earners, Not Rich Yet). They are a key demographic for financial institutions. Banks like these borrowers not only for their ability to maintain long-term financial products, but also for the opportunity to sell them other services like wealth management. Also, managing a single jumbo loan like a $2 million mortgage is more efficient for lenders than managing multiple smaller loans, so this market segment is very attractive.
Pros and Cons
Pros
Jumbo loans allow you to finance properties that exceed conforming loan limits, so you can access luxury or high-cost areas.
Some jumbo loans have competitive rates, which can make them a more affordable option for high-value properties.
You can buy high-value properties without combining multiple smaller loans.
Cons
Jumbo loans have stricter requirements, higher credit scores, and bigger cash reserves.
You need to make a larger down payment and higher closing costs compared to conforming loans.
Mortgage interest deductions are limited, so less tax benefits for borrowers with jumbo loans.
How to Shop for a Jumbo Loan
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Check your finances. Review your credit score, and debt-to-income ratio and make sure you have enough savings for a big down payment.
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Know the Jumbo Loans. Check the conforming loan limits in your area to see if you need a Jumbo Loan. For example, in California, Los Angeles county it’s $1,149,825 and in Texas, it’s $766,550.
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Work with a mortgage broker. Talk to a mortgage broker who specializes in Jumbo Loans. They can find the right lenders for you, save you time, and negotiate the best terms, especially for clients who need custom solutions.
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Find specialized lenders. Search for lenders who offer Jumbo Loans online, major banks, and regional mortgage companies. Check their reputation, licensing, and experience with big loans.
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Compare lenders. Get info from 3-5 lenders, request quotes, and compare their rates, repayment terms, fees, and loan limits. Choose the one that fits you best.
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Get pre-approved. Prepare your documents such as tax returns, income statements, and bank statements, and complete the pre-approval with your chosen lender.
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Lock in the best terms. Once you’ve selected a lender, lock in your interest rate to protect against potential fluctuations during the closing process.
Tax Considerations for Jumbo Loans
The Tax Cuts and Jobs Act (TCJA) limited mortgage interest deductions. For jumbo loan borrowers, only the interest on the first $750,000 of mortgage debt is deductible. So, borrowers need to consider tax implications when applying for a jumbo loan.
Jumbo vs. Conventional Loans
Loan Size. Jumbo loans are for properties that exceed conforming loan limits, conventional loans are for properties within the limits set by FHFA.
Interest Rate. Historically, jumbo loans had higher interest rates than conventional loans, but the gap has narrowed and in some cases, jumbo rates are now lower.
Down Payment. Jumbo loans require a 15% to 20% down payment, while conventional loans can be as low as 3% depending on the borrower’s qualifications.
Credit Score. Jumbo loan borrowers need a credit score above 700 while conventional loans can accept scores as low as 620.
Debt to Income Ratio. Lenders prefer lower DTI for jumbo loans, 36% to 43% while conventional loans can go up to 45%.
Cash Reserve. Jumbo loan borrowers need to show cash reserves of up to 12 months of mortgage payments, more than the reserves required for conventional loans.
Closing Costs and Risks. Jumbo loans have higher closing costs due to their size and risk profile, not backed by Fannie Mae or Freddie Mac like conventional loans.
Eligibility by Loan Limits. A jumbo loan is needed if the mortgage exceeds $766,550 in most areas, conventional loans are within conforming limits.
Alternatives to Jumbo Loans
Piggyback Loans (80-10-10 Structure). A piggyback loan allows borrowers to avoid a jumbo loan by taking out two loans. Typically, this is an 80% primary loan, 10% secondary loan (or home equity loan) and 10% down payment. This structure allows borrowers to stay within conforming loan limits, and often get lower interest rates and no private mortgage insurance (PMI).
Bigger Down Payment. By increasing the down payment, borrowers can reduce the amount financed to be within conforming loan limits. This is perfect for those who have big cash reserves, as this will allow them to get conventional loans with better terms.
Use Assets or Savings. Borrowers can liquidate or use other assets like savings accounts or investment portfolios to cover a big chunk of the property’s cost. This will reduce the loan amount needed and avoid a jumbo loan.
Special Loan Programs for Veterans (VA Jumbo Loans). Veterans or active-duty service members can consider VA jumbo loans. These loans have competitive interest rates and lower down payment requirements than standard jumbo loans, perfect for eligible borrowers. VA jumbo loans also don’t require private mortgage insurance and more savings.
Conclusion
FAQ
Are there additional fees with jumbo loans?
No, jumbo loans don’t have special fees or charges, unlike conforming loans. However, since the loan amount is much bigger, the total closing costs – 2% to 5% of the purchase price – will be bigger. For example, a $1 million property will have $20,000 to $50,000 in closing costs while a $500,000 property will have $10,000 to $25,000 in closing expenses.
Can I refinance my existing jumbo loan to get lower interest rates?
Yes, you can refinance a jumbo loan to get lower interest rates. But it’s more challenging than refinancing a conforming loan since lenders have stricter requirements. Jumbo loans also have higher closing costs which can extend the break-even period to recover these expenses.
Which is better: a jumbo loan or two conventional loans?
Choosing between a jumbo loan and two conventional loans depends on your financial circumstances and goals.
Jumbo Loan. Ideal if you prefer a simplified process with one monthly payment. Jumbo loans may also offer better interest rates and avoid private mortgage insurance (PMI), even with less than a 20% down payment. However, they typically require excellent credit, substantial cash reserves, and higher closing costs.
Two Conventional Loans. Suitable if you want more flexibility in qualifying, especially with a lower credit score or limited cash reserves. By using a piggyback loan (e.g., an 80-10-10 structure), you can avoid PMI while keeping the primary loan within conforming limits. However, this option may involve higher total closing costs and added complexity with managing two loans.
A jumbo loan is often better for high-income borrowers seeking simplicity and lower overall costs. Two conventional loans might be the right choice if you want to avoid PMI or have more flexibility in meeting qualifications. Consult with lenders to evaluate which option suits your needs.
