First, let’s get one thing out of the way. When we talk about home loans, there are two key terms you need to know — conforming loans and non-conforming loans. Conforming loans are those equal to or less than the financing limit set by the Federal Housing Finance Agency (FHFA). Non-conforming loans are those above that limit.
Jumbo mortgages are non-conforming loans used to finance more expensive homes. These loans are higher than the conforming limit, currently $647,200 in most areas. Hence the term “jumbo.”
Because jumbo loans are larger than traditional mortgages, they carry a higher risk. This means they can be harder to get than conforming mortgages. Typically, lenders only consider borrowers with a good credit rating, income and cash reserves.
What makes a mortgage jumbo?
Any loan that falls above the conforming limits is considered a jumbo loan. The FHFA sets conforming loan limits. Fannie Mae and Freddie Mac are government-created mortgage businesses that buy conforming mortgages on the secondary market. Jumbo mortgages are not purchased by Fannie and Freddie. The lenders keep them and take the risk if borrowers do not pay. This is why most lenders require additional proof the borrower will pay back the loan.
Understanding conforming loan guidelines
When lenders issue loans, they’re making an investment. But how does your loan turn into a bank’s investment? Well, lenders often bundle individual loans to sell on the secondary market. Selling loans allows lenders to earn more interest and keep cash flowing.
When Fannie and Freddie purchase loans, they provide:
- Cash flow for lenders to continue providing loans.
- Stability in interest rates for loans.
- Affordability for borrowers due to stable interest rates and lender liquidity.
Not all loans fall under FHFA guidelines. In order for a loan to be conforming, a buyer’s credit rating, debt-to-income ratio, loan-to-value ratio (LTV) and income history must meet Fannie Mae or Freddie Mac criteria. Loan limits are also considered when figuring out whether or not a loan will be conforming. Jumbo loans aren’t the only type of non-conforming loan, but they are one of the most common. .
Conforming loan limits are set by counties. Most counties fall under the typical limits. However, the limits are higher in certain real estate markets (e.g. Hawaii or Los Angeles)
In 2022, the conforming loan limits are:
- $647,200 in most counties
- $647,200-$970,800 in certain high-cost areas
There are currently 18 states and territories that have high-cost areas outside of Alaska, Guam, Hawaii and the U.S. Virgin Islands. These are:
- District of Columbia
- New Hampshire
- New Jersey
- New York
- West Virginia
Who needs a jumbo mortgage?
If you're financing a loan for $647,200 or more ($970,800 in high-cost areas), you’ll probably need a jumbo mortgage. It’s possible to avoid taking out a jumbo loan by increasing your down payment and lowering the loan amount. This is also a great strategy for homebuyers who want to offset a low credit score or other qualifying requirements.
Getting a jumbo loan is harder than a traditional mortgage, and you’ll want to talk to your lender for more information. To find out if you need a jumbo mortgage, check out Fannie Mae's loan limit guidelines.
Do jumbo mortgages have special considerations?
As mentioned before, jumbo mortgages are a potential risk for lenders. Be prepared to prove you have the means to pay off the loan. The exact requirements vary by lender, but some requirements you can expect include:
- Credit score: Lenders want borrowers to have a credit score of 680 or higher.
- Debt-to-income ratio: How much do you owe compared to how much you make? Many lenders look for a debt-to-income ratio of around 43%.
- Cash reserves: Do you have enough money in the bank? In most cases, you’ll need to show that you have some sort of savings or reserves to cover a minimum of 6-12 months of payments.
- Loan-to-value ratio: To calculate your LTV ratio, divide your loan by the total appraised value or purchase price of the property, whichever is lower.
- Down payment: The more you can put down, the better. This can help lower your LTV ratio and show you have the means to pay for the loan.
What are the benefits of a jumbo mortgage?
Jumbo loans may be nonconforming, but that doesn't mean they’re a bad idea. Some benefits include:
- Higher loan amounts: Without jumbo loans, most borrowers wouldn't have a way to purchase more expensive homes.
- Plenty of options: Jumbo loans are available as fixed-rate or adjustable-rate mortgages. In addition, jumbo mortgages come in a variety of terms that vary by lending institution.
- Potentially lower interest rates: Depending on market conditions, your jumbo loan may have a lower interest rate than traditional loans.
Are there any disadvantages of a jumbo loan?
There are a few things that make jumbo loans less desirable, but these are generally offset by the advantages. Remember, the lender needs to balance the risk. A few items to consider include:
- Higher monthly payments: If you're interested in keeping your monthly payments low, jumbo loans may not be a good fit. In many cases, the lender will tack on higher processing fees and may require more than one appraisal. If you roll these closing costs into your loan, you’re going to see an even higher monthly payment.
- Larger risk burden: The risk of jumbo mortgages doesn't fall on the lender alone. If you lose your job or are otherwise unable to pay, your higher payment is going to be more difficult to recover from.
- Higher qualification guidelines: The higher credit ratings and other requirements may make it more difficult to qualify for a loan. If you can’t meet these requirements, a jumbo loan may not be right for you.
Jumbo vs. conforming mortgage
Deciding between jumbo mortgages and conforming mortgages often comes down to cost. If you want to take a loan out above the conforming loan limits, you’ll likely need a jumbo loan. Of course, reducing your loan with a larger down payment could help you score a conforming loan.
Here are some of the main differences between conforming mortgages and jumbo mortgages to keep in mind:
- Jumbo loans have higher closing costs.
- Jumbo loans are harder to qualify for.
- Jumbo loans and conforming loans both come in a variety of terms and interest structures.
- Jumbo loans often have higher monthly payments.
- Mortgage terms can vary greatly between different lending institutions.
If you have concerns or aren’t sure if a jumbo loan is right for you, talk to an experienced Home Lending Advisor.
Which mortgage type is right for you?
Mortgages are not one-size-fits-all. Lenders look at the individual and their unique circumstances to determine whether they qualify for a loan.
Remember, lenders want to give you a loan. But they have to make sure you have the ability to make your full payment every month. To find out what your monthly payment might be, try adjusting some of your numbers in an online mortgage calculator