What Is a Jumbo Loan?

Written by Kim PinnelliReviewed by Nathan Brown, CFP®Updated: 4th May 2022
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If you need a loan larger than conforming loans allow, a jumbo loan may be your only option. They aren’t easy to get, and they often cost more.

It’s important to know what jumbo loans are, how they work, and how to get the best deal on them.

Here’s everything you must know about jumbo loans.

What is a Jumbo Loan?

A jumbo loan is any loan that exceeds the conforming loan amount. The amount changes annually, but for 2021, the conforming loan limit is $548,250 unless you live in a high-cost area. If you need a loan that exceeds $548,250, you’ll need a jumbo loan.

The loan itself isn’t much different than any other loan. You need a down payment to meet the lender’s credit score requirements and prove you can afford the payments. The largest difference for the lender is the loan amount and the risk they take lending it to you.

How Does a Jumbo Loan Work?

Jumbo loans aren’t government-backed. This means individual lenders underwrite and fund these loans. They don’t sell them to any investors or have to follow anyone else’s guidelines.

This is good news for borrowers because it gives lenders more leeway when setting their guidelines. However, some lenders have strict guidelines because of the risk of default on a higher loan amount.

Be prepared to need a higher down payment and good credit to qualify for a jumbo loan.

Jumbo Loan Limits

Unlike conforming loans, there isn’t a specific jumbo loan limit. If you exceed the conforming loan limit of $548,250, you’ll need a non-conforming jumbo loan that offers a higher loan amount.

But each lender has its own loan limit requirements. Some lenders allow loan limits in the millions while others cap them at a lower amount.

Either way, you must prove you qualify for the loan and can afford the payments beyond a reasonable doubt.

Jumbo Loan Interest Rates

Because of the higher risk jumbo loans pose, they often have higher interest rates. They aren’t terrible, especially if you have good credit, but lenders need to account for the risk of default they pose.

As with any loan, it’s a good idea to shop around to find the best rates available to you. Since jumbo loans are underwritten according to each lender’s criteria, some lenders may offer rates lower than others. Getting at least three quotes will help you determine which lender offers the best rates.

How Do You Qualify for a Jumbo Loan?

Qualifying for a jumbo loan can be a little trickier than qualifying for any other type of mortgage. Here’s what most lenders require.

Debt-to-Income Ratio

Like most loans, jumbo loan lenders require a specific debt-to-income ratio. They want to make sure you haven’t overextended yourself and won’t be able to afford the higher mortgage payments, real estate taxes, and homeowner’s insurance.

Most lenders allow a debt-to-income ratio of up to 45%, but this varies by lender. Some online mortgage lendersallow higher DTIs, and others want the DTI even lower.

Credit Score

Most lenders require high credit scores to get a jumbo loan. We’re talking about a credit score of 700 or higher in most cases.

This is because of the high-risk nature of jumbo loans. You’re at a much higher risk of default if you have a low credit score, and lenders can’t take that chance with a jumbo loan.

Available Cash on Hand (“Cash Reserves”)

Conforming loans typically don’t require cash reserves or money on hand, but jumbo loans require it. Cash reserves are money you have available (in liquid form) to cover your mortgage payment, including your taxes and insurance.

This lets lenders know you can cover your mortgage payment even if you lose your job or have another type of emergency.

Every lender requires a different amount of reserves, but on average, they want 12 months of reserves on hand to offset the risk of the higher loan amount.

Home Appraisal

All loans require an appraisal when you buy a home, but you may need two appraisals when you take out a jumbo loan.

This ensures the lender that the home is worth at least as much as you offered to pay. Since the home is the collateral for the loan, lenders pay close attention to the appraisal(s).

Consistent Income

Lenders don’t just hand out jumbo loans to anyone. They need to know you are a good risk, which means you have stable employment.

If you change jobs often or are at a new job, lenders may not be willing to lend you a jumbo loan quite yet. They like to see at least a 2-year history at a job to know that it’s stable and consistent.

What Documents Should You Include in Your Jumbo Loan Application?

You’ll need all the same documentation for a jumbo loan as you would a standard home loan, with a few exceptions.

Because of the higher risk jumbo loans pose, lenders often want more documentation to ensure you’re a good fit.

At a minimum, you’ll need:

  • A month’s worth of paystubs
  • W-2s for the last 2 years
  • 2 years of tax returns with all schedules
  • 2 – 3 months of bank statements
  • 2-3 months of investment account statements

Can You Buy an Investment Property with a Jumbo Loan?

There aren’t limits on the property type with jumbo loans, which means you can use a jumbo loan on investment properties too. But this may vary by lender.

You may need to shop around to find the best fit for your jumbo loan needs, which is a good idea so you can get the best rates and fees too.

If you’re buying an investment property with a jumbo loan, expect lenders to specify what they need to qualify you for the loan. This may include 12 months+ of reserves, a 720+ credit score, and a 36% or lower DTI.

Can You Get a VA Jumbo Loan?

VA loans, which are government-backed loans for veterans, offer a jumbo option, but with a twist. While they still have flexible guidelines like a standard VA loan, there are a few differences:

  • You’ll need a 740-credit score if you don’t want to make a down payment
  • You’ll need a 680-credit score with a 5% down payment
  • You’ll need a 640-credit score with a 10% down payment

Like any loan, you’re better off if you make a down payment. The down payment requirements are still much lower than traditional jumbo loans and VA loans have low-interest rates and fees too. It shows lenders you have skin in the game and are willing to make your payments on time.

Unlike traditional jumbo loans, you can only use a VA jumbo loan for a primary residence.

When Should You Consider Using a Jumbo Loan?

Jumbo loans are necessary if you’re buying a home that exceeds the conforming limit, but there are a couple of ways around it.

If you have a large enough down payment to bring the loan amount below $548,250, you can avoid the jumbo loan and get a conforming loan.

You may also sidestep the issue if you can get a piggyback loan or second loan for the amount above the $548,250.

If you can’t bring your first mortgageloan amount below that threshold, you’ll need a jumbo loan, but it’s not the end of the world.

As long as you have good qualifying factors and you shop around for the best rate, you’ll be in good hands.

Can You Refinance a Jumbo Loan?

Just like standard loans, you can refinance your jumbo loan too. They have two options:

  • Rate/term refinance – You can refinance your mortgageto get a better rate or change from an ARM to a fixed-rate loan. You won’t take cash out of the equity, but you’ll either save money on interest or get a better term for your loan.
  • Cash-out refinance – If you have over 20% – 30% equity in your home, you may be able to tap into it with a cash-out refinance. This is a first mortgage refinance for an amount larger than you owe now. You receive the difference in cash and can use it however you need. Cash-out refinances on a jumbo loan have stricter requirements and higher interest rates.

Bottom Line: What Is a Jumbo Loan?

If you need a jumbo loan, shop around. Because they aren’t as regulated as conforming loans, see what several lenders offer.

Some may have more flexible guidelines than others, and most lenders will have varying interest rates/fees. Find the loan that suits your budget and keeps your interest rate as low as possible.

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Kim Pinnelli
Kim Pinnelli

Kim Pinnelli is a Senior Writer, Editor, & Product Analyst with a Bachelor’s Degree in Finance from the University of Illinois at Chicago. She has been a professional financial writer for over 15 years, and has appeared in a myriad of industry leading financial media outlets. Leveraging her personal experience, Kim is committed to helping people take charge of their personal finances and make simple financial decisions.