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What is a jumbo loan?

A jumbo loan is a type of mortgage that is used to finance real estate that is too expensive for a conventional conforming loan. For that reason, they are sometimes also called non-conforming loans.

In most places, jumbo loans start at $510,400. In some high-price areas, it’s higher, at $765,600. It’s worth noting that jumbo loans aren’t just for mansions and people scooping up investment property: Sometimes jumbo loans are just necessary to get to the purchase price of an ordinary primary residence in expensive areas. If average home prices top $1 million, mortgage loans might be jumbo loans despite a 20% down payment — even for first-time homebuyers starting small.

Jumbo home loans are higher-risk propositions for lenders because they cannot be guaranteed by Fannie Mae and Freddie Mac. So that means the lender is on the hook if the borrower defaults.

Jumbo loan limits

With home prices going up around the country, the Federal Housing Finance Agency (or FHFA—the org that oversees Fannie Mae and Freddie Mac) announced new conforming loan limits for the year 2020. As a result, most places around the country saw an increase in the figure from 2019.

Those new limits mean that loans can be even bigger before they’re considered jumbo. That may be good news for prospective homebuyers looking at higher-priced properties who can now avoid needing to meet stricter qualification requirements.

Again, that limit for non-jumbo loan amounts in most parts of the U.S. as of 2020 is $510,400 for a single-family residence.

In other high-cost areas, such as parts of California; New York;Washington, D.C.; and Hawaii, this amount is higher: $765,600.

Jumbo vs. conforming loans

Now that we’ve laid out the definition of a jumbo loan, let’s compare it to a conforming loan.

First, it helps to know why a conforming loan is even called that. The term gets its name because these loans conform to the boundaries and guidelines set forth by Fannie and Freddie. These loans tend to have less strict terms and eligibility requirements, plus interest rates that can be lower than jumbo, or non-conforming, loans.

Note that conforming loans are not government-backed, so options like USDA loans, FHA loans, and VA loans don’t fit in this category. And because they are not backed by the government, conforming loans are types of conventional loans.

Conforming loans all share some characteristics, such as down payment, credit score, debt-to-income ratio, and loan limit requirements.

The total amount of interest you’ll pay on a conforming loan is variable. It’s based on your interest rate and the length of the loan.

To sum up, the main difference between jumbo and conforming loans is the size—but other factors do come into play such as interest rates that might be higher (though not necessarily), stricter rules to qualify for homebuyers, an extra appraisal (so the lender can be sure your investment is really worth what it’s lending on), and potentially higher closing costs associated with those tougher qualifications. We’ll get into that more below.

Jumbo loan interest rates

Jumbo loans are available as fixed-rate or adjustable-rate loans.

It used to be that you could expect to find higher interest rates on jumbo mortgages than rates on conforming loans. That’s still true these days, but the margin is much less—often, these loans are highly competitive. And in some cases, mortgage lenders might even offer lower rates on jumbo loans.

Unlike with conforming loans, which generally require buyers with small down payments to buy private mortgage insurance (PMI), you may not need it for a jumbo loan. It’s up to the lender to decide.

Jumbo loan requirements

Remember that jumbo loans are riskier for lenders, so the underwriting criteria for approval is stricter.

First, lenders may be looking for a credit score higher than 700 to qualify—and in some cases they want to see a credit score up to 720. So your credit history is going to be especially important here.

Lenders will also look harder at your debt-to-income ratio. They want to know that you’re not too leveraged, which would make lending to you an even greater risk. If you have solid cash reserves in the bank, you’re more likely to qualify. Some lenders might ask for a high enough bank balance to cover a full year of mortgage payments in order to approve a jumbo loan.

In order to prove all of this, you’re going to need to provide serious documentation—likely even more extensive than you would for a conforming loan.

Where conforming loans might require a low down payment, jumbo mortgage lenders typically want a down payment of at least 20%, although some might go as low as 10%.

Effects of COVID-19 on jumbo loans

As the COVID-19 pandemic wreaks havoc on the world economy, mortgage rates have retreated significantly. While many potential homebuyers are holding back as the crisis plays out—by choice or by financial necessity—some are still in the market for new homes. As well, there are homeowners who would be looking to refinance to save money at this time. But both conforming and jumbo loans are harder to get.

Mortgage credit availability in March 2020 fell to its lowest level in five years, according to a survey by the Mortgage Bankers Association cited in MSNBC. The reason? A huge drop in liquidity as investors in jumbo mortgage-backed bonds pull back. Jumbo mortgages are among the most affected in part because of the risk and increased likelihood of default.

Amid the crisis, expect new underwriting guidelines. For instance, JPMorgan Chase, one of the country’s biggest mortgage lenders, added stricter requirements: a minimum FICO credit score of 700 and 20% down payment.

In other words, getting a jumbo loan could pose a steep challenge in the time of COVID-19, with even stricter qualifications than usual.