A jumbo mortgage, also known as a jumbo loan, is a loan that exceeds the maximum conventional loan limit set each year by the Federal Housing Financing Agency (FHFA). For this reason, a jumbo mortgage may also be called a non-conforming loan.
Jumbo loans are generally reserved for high-income individuals looking to purchase properties that cost more than the FHFA‘s limit (as of 2023, this is set at $726,200).
Due to the high value and increased risk to the lender, jumbo loan mortgages can be difficult to qualify for and more expensive than conforming loans.
How a jumbo mortgage works
Jumbo mortgages work in a similar manner to a standard mortgage loan. Repayments can be set on either a fixed or variable rate and are typically paid over 15-30 years. The main difference is the higher threshold required to secure approval.
While they are not guaranteed by Fannie Mae and Freddie Mac, jumbo loans must still comply with the qualified mortgage guidelines of the Consumer Financial Protection Bureau (CFPB). This is to make sure that ability-to-repay rules have been followed.
General requirements for a qualified mortgage include a limit on the annual percentage rate, or APR, of the loan and a maximum 30-year loan term. Loan features that are considered risky, like balloon payments, are also not permitted.
What is the jumbo mortgage rate cut-off?
The FHFA’s conforming loan limit is revised annually and varies across the states, counties and territories of the United States. In 2023, the limit for most areas was raised to $726,200 – a $79,000 increase on the previous year. In some high home price areas, this is increased to $1,089,301.
Jumbo mortgage limits by state
The states within First Merchants’ footprint (Indiana, Illinois, Michigan, and Ohio) all use the FHFA’s standard conforming loan limit. In 2023 this was set at $726,200.
|US state/territory||Single-unit property limit|
The following table shows US states and territories that use conforming loan limits above the FHFA‘s standard limit. Note that this is the maximum limit for the state, but some counties may choose to use a lower rate.
Generally, mortgages that exceeded these limits are considered jumbo loans.
|US state/territory||Single-unit property limit|
|U.S. Virgin Islands||$1,089,300|
What type of buyer should consider a jumbo loan?
Jumbo mortgages are an option for high-income earners looking to purchase a property that is too expensive to finance on a conforming loan. While wealth is no guarantee of an excellent credit rating, the ability to make larger down payments and demonstrate access to cash reserves can build the lender’s confidence, helping to secure a jumbo mortgage loan.
Try using our range of mortgage calculators to find the right loan option for your circumstances.
Qualifying for a jumbo mortgage
Securing a jumbo mortgage could be harder than a standard home loan depending on your financial position. Jumbo loans are a riskier option for lenders because they are non-conforming, which means they are so large that they can’t be guaranteed by Fannie Mae and Freddie Mac. As a result, the lender would not be protected if the borrower defaults. This is why the requirements to qualify for a jumbo loan are much higher than a standard loan.
As part of the stricter requirements from lenders, a high credit score is required to take out a jumbo mortgage. The lowest credit score that many lenders will accept is between 680-700. By contrast, conforming loans typically require a minimum of 620.
Debt-to-income ratio (DTI) is a metric used to calculate how much of your income is being consumed by paying off debts. The calculation simply divides your monthly debt payments by your pre-tax earnings. For example, someone who earns $2,000 per month pre-tax and pays $1,000 in debts would have a DTI of 50%.
Different lenders will vary, but most jumbo mortgage lenders will require a DTI lower than 43%. This demonstrates that you have enough cash available to cover repayments.
Having significant cash reserves will help to secure approval of a jumbo mortgage loan as it demonstrates that you will be able to keep up with regular payments. Lenders will typically want to see that borrowers have enough cash in reserve to cover 6-12 months' worth of mortgage payments.
For a jumbo mortgage, a large down payment is expected given the higher property values. This can vary between lenders but will typically be between 10% and 20% of the purchase price.
While a 20% down payment may not always be required, the ability to make a larger payment is likely to have a positive impact on your application.
Proof of consistent income and cash reserves will require some additional paperwork. The type and volume required will vary between lenders, but most will require:
- 1-2 months of pay stubs
- 2 months of bank statements
- At least 2 years of tax returns
Applicants who are self-employed or business owners will need to supply additional information like business tax returns and balance sheets.
A standard part of any mortgage loan is to have the house appraised. This will help the lender to correctly value the property and will determine the value of the loan they will authorize. A typical appraisal will look at:
- Condition of the property and its structure
- Size and layout of the home
- Any upgrades made to the home
- Recent sales of similar homes in the area
- Property zoning and any environmental concerns
In cases with high value properties, lenders may ask for two appraisals. This is normally the case when the loan amount is over $1 million.
Advantages of a jumbo mortgage
If they are in your price range, taking out a jumbo loan for a property can have significant benefits:
- High-value properties - the ability to finance a high-value house that exceeds the FHFA’s limit.
- Competitive interest rates – while jumbo rates can be slightly higher than those of conventional loans, they are still competitive.
- Flexibility of terms - loans can be fixed rate (typically 15-30 years) or adjustable (3-10 years).
- Ownership options - with rising house prices, jumbo loans could be the only option for buyers looking to live in more affluent neighborhoods.
Disadvantages of a jumbo mortgage
- Harder to qualify for – higher credit score and lower DTI ratios are required.
- Manual underwriting – due to the amount of money involved, underwriting will be conducted in-person and not automated. This makes the process slower and more detailed.
- Larger down payments – significant cash reserves are required.
- Higher tax - only interest on the first $750,000 of mortgages can be deducted on tax returns. With local and state tax deductions also capped at $10,000 per year, jumbo loan holders could end up with significant additional costs.
- Higher closing costs - jumbo mortgage loans can have significantly higher closing costs as the limits set by Fannie Mae and Freddie Mac do not apply.
Frequently Asked Questions (FAQs)
What is the difference between a jumbo mortgage and a regular conforming loan?
Conforming loans are for smaller amounts and are generally available to more people as the qualifying requirements are less stringent than jumbo loans. Conforming loans follow Freddie Mac and Fannie Mae guidelines and are available from more lenders.
Jumbo mortgage loans are non-conforming due to their high value, meaning that Freddie Mac and Fannie Mae guidelines do not apply. This creates more risk for lenders and means that borrowers must have excellent credit and a large down payment to be considered.
Estimate how much mortgage you can afford and the potential cost of monthly payments with our mortgage payment calculator.
Can jumbo mortgage loans be refinanced?
Yes, many lenders that offer jumbo mortgages will also refinance. As with the initial application, refinancing requires strict credit and cash reserve requirements to be met before approval.
What is a super jumbo mortgage?
Super jumbo mortgage is a type of loan for extremely expensive property. While there is no formal definition (the FHFA sets a low threshold for jumbo loans, but nothing higher), it is generally considered that loans valued at $3 million to $30 million are known as super jumbo mortgages.
Due to the huge amounts of money involved, very few lenders will offer super jumbo loans, leaving them to specialists.
What is a jumbo reverse mortgage?
A jumbo reverse mortgage allows the owners of high-value properties access of up to $4 million of equity. As with a jumbo mortgage, standard government regulations are not applied. This allows for higher borrowing but increases risk as some protections may not apply.
Find the right loan solution for you
Whether you are looking for a non-conforming mortgage, considering refinancing, or buying your first home, First Merchants can help. For more information, call us at 1.800.205.3464 or contact us.