Most mortgage programs feature limits that determine how much you can borrow. If you want to buy a property priced above those limits, you may need to take out a jumbo loan. Jumbo loans have stricter requirements than conforming loans because they’re riskier for the lender. Lenders set the upper limit of jumbo loans, so you may be able to borrow up to $5 million or more—depending on which lender you borrow from.
What Is a Jumbo Mortgage?
A jumbo mortgage is a home loan that exceeds the conforming loan limit. Each year, the Federal Housing Finance Agency (FHFA) sets the limits for conforming loans, which are home loans that Fannie Mae or Freddie Mac can purchase on the secondary market. Fannie and Freddie are government-sponsored entities that buy mortgages from the banks and financial institutions that originate them; they don’t lend money to individuals themselves.
Because these mortgages are riskier and can’t be sold to Fannie and Freddie, lenders charge higher interest rates and require larger down payments compared to conventional mortgages.
Who Is a Jumbo Loan for?
If you want to buy a property that’s more expensive than the conforming loan limit in your area, you’ll likely need a jumbo mortgage. Because jumbo loans are larger, they generally have higher monthly payments and down payments and typically go to high-earning borrowers.
The conforming loan limit can vary from one county to the next, so it’s a good idea to know the limit in the area where you’re shopping for homes. This can help you set a budget.
Jumbo Loan Limits
For 2023, the FHFA’s conforming loan limit goes up to $726,200 for one-unit properties throughout most of the U.S. and $1,089,300 in some high-cost areas. The baseline limits for most of the country are as follows:
- One-unit (single-family home). $726,200
- Two-unit (duplex). $929,850
- Three-unit (triplex). $1,123,900
- Four-unit (quadplex). $1,396,800
In some high-cost areas, the limits are as high as $1,089,300 for a one-unit property and $2,095,200 for a four-unit property.
The limit is linked to the size of the loan, not the price of the property. So if you buy a home for $800,000 but only borrow $650,000, for example, you may take out a conforming loan. The upper limit of a jumbo loan depends on the lender. Some lenders issue jumbo loans up to $2 million, while others will go to $5 million or more.
If you’re looking for a jumbo loan, you’ll first need to estimate how much you want to borrow. Then contact multiple lenders and ask about their jumbo loan limits. Once you find banks and credit unions that offer jumbo loans in your price range, you can compare loan terms across several offers.
If you have strong credit, a high income, a large down payment and several months’ worth of cash reserves, you may qualify for the amount you need. But if you lack one of these factors, the lender may lower your loan amount.
Jumbo Loan Terms
Jumbo mortgages are typically available in 15-, 20- and 30-year terms, and you may not have to pay for private mortgage insurance (PMI). Lenders typically charge PMI for down payments less than 20%.
As with standard mortgages, lenders set their own mortgage rates for jumbo home loans. But rates for jumbo loans are often higher because they pose more risk for the lender. You may qualify for a lower rate with excellent credit and a large down payment.
Jumbo Loan Requirements
When you apply for a jumbo loan, the lender checks your income and outstanding debts to see if you can afford the payments. Your credit score and the home’s appraisal will also factor into the lender’s decision.
Debt-to-Income Ratio
Your debt-to-income (DTI) ratio tells a lender how much of your monthly income goes toward debt payments; a higher DTI ratio signals risk. If you have a financial setback, there’s a higher chance you’ll default on mortgage payments. With conforming loans, you might qualify with a DTI ratio of up to 50% in some cases. But lenders usually set a maximum DTI ratio for jumbo loans of around 40% to 43%.
Credit Score
Your credit score is another important factor in the home loan process. Having strong credit shows that there’s a good chance you’ll repay your mortgage on time. While a credit score of 620 may help you qualify for a conforming loan, lenders typically set higher credit score requirements for jumbo loans. You may need a credit score of at least 700 to qualify.
Appraisal
Given the large sum involved, the lender will order an appraisal to determine if the property’s valuation lines up with the sales price and the mortgage loan amount.
Loan-to-Value Ratio
A loan-to-value (LTV) ratio measures the size of the home loan against the value of the property. For example, if you buy a home worth $1 million and take out a loan for $800,000, then your LTV ratio is 80%. Your down payment comprises the remaining 20%. Lenders generally require a down payment of around 10% to 20% on jumbo loans. Depending on the down payment, your LTV ratio typically can’t exceed 80% to 90%.
Assets and Cash Reserves
Your lender will ask for copies of your bank statements to ensure you have the money for your down payment, closing costs and cash reserves, which are funds you can use in a financial emergency. Lenders may require you to have between six and 12 months’ worth of cash reserves available. If you’re not planning to use cash from your bank accounts for these costs, then you may be able to show statements from your investment accounts.
Employment History
Your lender will look for a history of stable employment and verify you have a job to make sure you can cover the loan payments. You’ll need to provide two years’ worth of W-2 forms, tax returns and recent pay stubs. Your lender will also contact your employer to verbally confirm your employment.
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