What is a Jumbo Loan?

A jumbo loan is a home mortgage for a higher amount.

Choosing this type of loan

One of the most important parts of buying a home is determining the kind of mortgage you need. At the very least, this part can be overwhelming – especially if the amount you need to finance is higher than the average home.

Say you’re in the process of buying your dream home, and it’s much more expensive than average. You need to find a loan that allows you to finance it without breaking the bank. A regular loan amount might not be an option because the home value exceeds the normal Fannie Mae and Freddie Mac loan-servicing limits. You may find yourself in this position if you’re buying a luxury home, a home with expensive amenities that drive up the cost, or a home in a pricier neighborhood. This is when you may need to opt for what’s called a jumbo loan.

Jumbo loans, often referred to as jumbo mortgages, are home loans specifically for amounts that exceed the conforming limit set by the Federal Housing Finance Agency (FHFA) and the United States government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.

Why use a jumbo loan?

Jumbo loans are a lot like conventional mortgages, but they have more built-in support for the risks that come with making a high-price property purchase. Jumbo loans are not only used to finance primary residences – they are also popular for financing investment properties and vacation homes.

For many people (whether they’re first-time homebuyers or experienced investors), housing can be a smart investment. Most borrowers that take out jumbo loans have good credit, and they often leverage the money they get in return and put it back in their investment or business – ultimately growing their wealth and financial health over time.

Preparing to get a jumbo loan: What to expect

If you want to apply for a jumbo loan, make sure that you’re prepared to undergo the vetting process by having all your financial documents on-hand.

Qualifying for a jumbo loan

The vetting process for jumbo loan applicants is based on the same formula as other mortgages, but with stricter requirements. Here is a list of what lenders consider and the requirements you must meet:

  • A credit score of 700 or higher
  • A down payment of 20% or more
  • Sufficient cash reserves to cover at least one year of mortgage payments
  • More detailed documentation to prove your financial stability
  • Higher interest rates
  • Higher closing costs and fees

Key takeaways

  • Jumbo loans are an option for borrowers who want to finance a property that exceeds the limits set by the FHFA.
  • FHFA limits for property value vary by county.
  • Jumbo loans cannot be guaranteed or purchased by Fannie Mae or Freddie Mac.
  • Jumbo loan applicants will have to meet stricter qualification requirements than conventional loan applicants.
  • Jumbo loan applicants will need to have a higher credit score and a lower DTI ratio to be approved.

How to find jumbo loan limits by area

You can access the FHFA map for details about each area’s requirements by state here.

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