What is a Jumbo Loan and When Do You Need One?

If you live in an area with a high cost of living, or if you’re in the market for a more expensive home, you may need a jumbo loan to finance your purchase. Jumbo loans are mortgages with loan amounts that exceed local conforming loan limits. There’s plenty to understand about these loans before signing on the dotted line, though, including their more stringent minimum credit score and down payment requirements. Here’s what to look out for as you start your home search.

How does a jumbo loan work?

In real estate, the term “jumbo loan” refers to any conventional mortgage that is larger than the conforming loan limits set by the Federal Housing Finance Agency (FHFA) each year.

The FHFA is a regulatory agency that oversees Fannie Mae and Freddie Mac, two government-backed entities that buy and sell mortgages from private lenders. FHFA regulations prevent Fannie Mae and Freddie Mac from purchasing any mortgage loans that exceed the year’s conforming loan limits.

Jumbo loans are riskier investments for lenders, as there’s no guarantee they’ll be able to quickly recoup their investment. In turn, lenders try to mitigate this risk by making jumbo loans more difficult for borrowers to qualify for and potentially more expensive than traditional mortgages.

Understanding conforming loan limits

Since some real estate markets are more expensive than others, conforming loan limits vary by county. When you’re ready to buy a home, your loan limit is determined by the county in which you intend to purchase the property.

Jumbo loans are sometimes referred to as “nonconforming loans” because they fall outside of these limits. In 2024, single-family mortgages with balances higher than $766,550 in most U.S. counties (and $1,149,825 in certain high-cost areas) are considered jumbo loans.

Jumbo loans vs. conforming loans

Now that you have a better understanding of jumbo loans and how they work, here’s how they differ from standard mortgages:

Bigger down payment

These days, conforming loans tend to come with low down payment requirements, typically ranging between 3% to 5% of the home’s purchase price. For a jumbo loan, however, the down payment is usually much higher. While it’s possible to find jumbo loan lenders who will accept a 10% down payment, most will require you to put down at least 20%.

Higher interest rates

In many cases, jumbo mortgage rates may be higher than the rates tied to conforming loans. Still, interest rates can vary widely (depending on your lender and the strength of your financial profile), so it’s a good idea to shop around before applying for a home loan.

3 tips to save on jumbo loan interest rates

1. Build your credit score. Since the lowest interest rates are typically given to those with the highest credit scores, work to boost your credit score as much as possible by paying more than the minimum on your monthly debt and making on-time payments every time.

2. Make a larger down payment. If you can save enough to make a larger down payment, lowering your loan-to-value (LTV) ratio may help you secure a lower interest rate.

3. Shop around for a loan. You’ll want to get quotes from at least three mortgage lenders before applying for a loan.

Higher fees

Since the principal balance is higher than usual on a jumbo loan, any fees that are expressed as a percentage of the loan balance, such as closing costs and origination fees, will be higher as well.

Qualifying for a jumbo loan

Jumbo loan eligibility requirements tend to be more stringent than the ones for conforming loans. This is what you can expect:

Credit score

A minimum 700 credit score may be required for a jumbo loan, which is significantly higher than the minimum required for conventional or government-backed loans. That said, it isn’t impossibly high, and is considered only a “good” credit score — you won’t have to reach as high as a “very good” or “exceptional” score to get a jumbo loan.

Down payment

Although it’s possible to find lenders with lower down payment requirements, it’s a good idea to prepare to make a 20% down payment on your home loan. Many jumbo lenders may even require more.

At the bottom end of jumbo loans, this would amount to a required down payment of $153,310, but rises with higher loan amounts. Jumbo loans can go as high as $1 million to $2 million, according to the Consumer Finance Protection Bureau (CFPB). In that case, a minimum down payment would end up in the $200,000 to $400,000 range.

Debt-to-income (DTI) ratio

Your DTI ratio is a measure of your total monthly debt divided by your gross monthly income. It shows lenders how likely you are to comfortably handle another recurring debt payment.

A maximum 45% DTI is common for jumbo loans. Although you may have a high income, if you also carry a lot of debt, you may have trouble qualifying for a jumbo loan.

Cash reserves

You’ll likely be required to show that you have several months or years of cash reserves on hand to safeguard against unexpected expenses or other financial speedbumps. The term “cash reserves” refers to the amount of money you have in savings reflected as the number of monthly mortgage payments you’d be able to cover.

However, the exact amount required for cash reserves varies by lender and may change based on your credit score, DTI ratio, the type of property you’re financing and how many homes you have financed. It’s reasonable to expect that jumbo lenders will want to see proof of six to 24 months of cash (or liquid assets) in your bank account.

Closing costs

Closing costs for jumbo loans can be higher than for conventional or government-backed loans — especially in the case of nonqualifying jumbo mortgages, which aren’t limited in how much they can charge in upfront fees by either the CFPB’s or Fannie’s and Freddie’s rules.

Appraisals

Some lenders may require a second home appraisal to verify the value of the home that you intend to purchase.

Manual underwriting

Most jumbo loans are manually underwritten, which means that — unlike the bulk of conventional or government-backed loans — they aren’t fed into a computer program that decides whether you qualify for the loan. Instead, an actual human (called an underwriter) evaluates your financial picture and your ability to pay back the loan.

Pros and cons of a jumbo mortgage

A note about jumbo loans and government-backed loan programs

Government loan programs typically don’t offer jumbo loans. There is, however, one exception: VA loans backed by the U.S. Department of Veterans Affairs (VA). For qualifying military borrowers with full entitlement, there’s no loan limit on VA home loans.

Is a jumbo loan right for me?

If home values in your area exceed the area’s conforming loan limits, a jumbo loan may be your only option when it comes to financing your home purchase.

Still, jumbo loans are generally meant for borrowers with strong financial profiles. You’ll need a good credit score, a low DTI ratio and plenty of savings to qualify. If you feel like meeting these requirements will be too much of a stretch financially, taking out a larger-than-normal loan may not make sense.