What Is a Jumbo Mortgage Loan?

If you’re shopping for a higher-priced home, you may come across the term “jumbo mortgage loan.” This type of home loan is designed for properties that exceed standard lending limits. 

Learn how to answer the question, “What is a jumbo loan?” and discover some tips for qualifying. You’ll also learn the pros and cons so you can decide whether a non-conforming mortgage is right for you. 

What is a jumbo loan?

A jumbo mortgage loan is a housing loan that surpasses conforming loan limits. The Federal Housing Finance Agency (FHFA) sets these limits.

The FHFA establishes a maximum loan amount that can be backed by government-sponsored enterprises like Fannie Mae and Freddie Mac. Loans that fall within these limits are called conforming loans. 

A jumbo loan exceeds FHFA limits and cannot be sold to Fannie Mae, Freddie Mac, or other entities that only accept conforming mortgages. Lenders are loaning you more money with a jumbo mortgage, which means they are taking on more risk. As such, lenders apply stricter qualification standards. 

How jumbo loans differ from conventional loans

The biggest difference between a jumbo loan and a traditional mortgage is the loan limit. If you want to buy a home for a purchase price that exceeds conforming loan limits in your area, you’ll need a jumbo mortgage. Additionally, jumbo loans usually require you to have:

• A higher credit score
• More money to put down
• Lower debt-to-income (DTI) ratios

Historically, jumbo loans had higher interest rates. Today, you may be able to find interest rates that are competitive with conventional mortgages, provided you have a high credit score. 

Finally, lenders will heavily scrutinize the deal during underwriting. That’s because the loan is inherently riskier. 

Jumbo loan limits by area

In most parts of the U.S., the conforming loan limit is the same. However, there are several high-cost areas where conforming loan limits are higher. FHFA identifies four statutorily designated areas with limits that are 50% higher. Those areas are Alaska, Hawaii, Guam, and the U.S. Virgin Islands. 

Over the years, several legislative acts have designated other high-cost areas throughout the country. These areas typically include major metropolitan hubs, such as New York City. 

Before you apply for a jumbo loan, it’s important to check the current limits for your area. The home price point you are looking at may qualify for a conventional loan if it is under the cap. 

Requirements to qualify for a jumbo loan

Now that you can answer the question, “What is a jumbo loan?” take a look at what it takes to qualify for one. Since a jumbo mortgage is a non-conforming deal, lenders will heavily scrutinize several aspects of your loan application. 

Credit score

Lenders don’t offer much flexibility when it comes to credit score requirements for a jumbo loan. You’ll need a score of 700 or higher. If you have a score of 740+, you may be able to secure better rates.

If your credit score is too low, focus on building it with tools like Kikoff that help you report verified rent payments, dispute errors on your report, and more. Add positive payment activity to your credit profile without a hard credit check. 

Down payment

You’ll need to put more money down when taking out a jumbo loan. A lender will verify that you have enough cash to put 10% to 20% down or more. Some lenders may require you to put down up to 30%, especially if there are other risk factors at play. 

Putting more money down makes the deal less risky for the lender and improves your approval odds. However, coming up with such a large down payment can be tough, so make sure you have a clear price point in mind. 

Debt-to-income ratio

Your DTI measures how much of your monthly income goes toward debt. Many lenders require you to have a DTI below 43%. The lower your DTI, the better. If less of your income is going toward debt, it shows you can comfortably handle higher monthly payments. 

Cash reserves

Lenders will also analyze your cash reserves, which is how much money you have left after closing. For jumbo loans, lenders may require you to have 6-12 months’ worth of mortgage payments in reserves. 

Pros and cons of a jumbo loan

The pros of a jumbo mortgage loan include:

• The ability to finance higher-priced homes
• Flexible property options
• Potentially competitive rates

The cons are:

• Higher down payment requirements
• Strict underwriting
• More financial risk

If you want to finance an amount that exceeds conforming loan limits, a jumbo mortgage is your only practical option. Make sure you are well-qualified by making payments on time and saving a large down payment. 

Next steps

If you are interested in applying for a jumbo mortgage loan, you’ll need a strong financial profile and large down payment. Platforms like Kikoff can help you build your credit profile and boost your score. Our credit-building solution includes several free and paid tools that put you in control of your financial future. Kikoff offerings include:

• A free credit account
• Paid subscription options
• Rent reporting
• Secured credit cards
• Invite-only credit builder loans
• Free dispute tools

Kikoff gives you the freedom to upgrade, downgrade, or cancel your subscription at any time. 

Use on-time payments to build credit with Kikoff.