Jumbo Loans: What Are They And How Do They Work?

Hanna Kielar6-minute read

April 12, 2021

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One of the most important components of shopping for a home is identifying the type of mortgage that’s best for you. But what happens if you need to take out a very high-value mortgage?

You may need a jumbo loan to buy the house of your dreams. Here’s a guide that can help you decide if a jumbo loan is right for you.

What Is A Jumbo Loan?

A jumbo loan, or jumbo mortgage, is a mortgage loan that exceeds the limit set by the Federal Housing Finance Agency (FHFA). Jumbo loans cannot be secured by the government-sponsored Fannie Mae or Freddie Mac, which make these loans riskier for lenders.

What Are The Jumbo Conforming Loan Limits?

Fannie and Freddie set limits on how high your mortgage can be – they’re called conforming loan limits. Mortgages that fall under the limit have insurance that protects the lender. Jumbo loans are sometimes called nonconforming loans because they go above this limit.

Conforming loan limits vary by state and market. In 2021, you can only borrow up to $548,250 for a single-family unit in most parts of the U.S. However, conforming loan limits go as high as $822,375 in Alaska and Hawaii.

They apply to single-family units only – multifamily unit limits are higher and also vary by state. If the amount of money you borrow goes above your limit, your loan automatically becomes a jumbo loan.

Jumbo Loan Rates

It makes sense that lenders might charge higher interest rates on jumbo loans because, as mentioned before, there’s so much risk involved. However, market data suggests that interest rates on jumbo loans are very competitive with market rates.

At today’s rates, the difference between conforming and nonconforming loans ranges from just 0.25% – 1%. In fact, some jumbo loans have rates that are lower than other mortgage loans.

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How Does A Jumbo Loan Work?

Like conventional mortgages, you can get jumbo loans in a variety of terms or repayment schedules, and they can be fixed- or adjustable rate loans

However, jumbo loans work differently than conventional mortgages. These loans have stricter requirements than other types of mortgages, and you’ll have to meet very specific property type, down payment, credit score and debt-to-income ratio requirements to get one.

Property Types

You can buy various types of properties with a jumbo loan. As long as you meet your lender’s other requirements, there are no government restrictions on how you can use your jumbo loan. You can use most jumbo mortgages for primary residences, vacation houses and investment properties.

If you want a VA jumbo loan, you still need to meet VA property standards like you would with a standard VA loan. You must intend to live in your home as a primary residence. You can’t buy a vacation home or investment property with a VA jumbo loan.

Your home needs to meet VA appraisal standards as well. The home has to be “clean, sanitary, sound and safe” before you move in. When you close on your loan, a VA appraiser will take a look at the property to make sure it qualifies.

Down Payment

Jumbo loans typically have much higher down payment requirements compared to conventional loans. It’s common to see lenders require 20% down on jumbo loans for single-family units. You may also need a higher down payment for second homes and multifamily units. Finally, the down payment required is based on your loan amount and credit score as well.

For a VA jumbo loan, it’s possible to get a loan without a down payment, but only with a median FICO® Score of 740 or higher. With a median score of 680 or better, the minimum down payment can be 5%. 

Finally, with a median credit score of 640 or better, you need a 10% down payment. Other lenders may have different policies regarding down payments for VA jumbo loans. If you have an impacted title, meaning you only have partial entitlement left, the down payment rules work a little bit differently.

Credit Score

Your credit score is a major factor when it comes to getting a jumbo mortgage. Your credit score is a numerical rating of how reliable you are as a borrower. Your score can range from 300 – 850 and several factors are evaluated to determine your credit score.

You’ll usually need a credit score of at least 700 to get a jumbo loan for a 1- or 2-unit with a loan limit up to $1 million. Between $1 million – $1.5 million, the necessary credit score is 720. Between $1.5 million – $2 million, you need a 740 credit score.

For a second home, you need a credit score of between 720 – 740 depending on the loan amount. At this time, Rocket Mortgage® doesn't offer cash-out refinances on second home jumbo loans.

Debt-To-Income Ratio (DTI)

Your debt-to-income (DTI) ratio compares how much money you earn versus how much debt you have. To find your DTI ratio, divide all of your required minimum monthly payments by the amount you earn before taxes.

For example, if you pay $1,000 a month in bills and you bring home $2,000 a month before taxes, your DTI ratio is 50%: $1,000 divided by $2,000.

A low DTI ratio is very important when you get a jumbo loan because it tells lenders that you will have enough cash flow to cover your mortgage payments. For a jumbo loan from Rocket Mortgage®, you'll need a DTI between of 45% or lower in order to qualify depending on whether you're looking to do a cash-out refinance, rate/term refinance or purchase.

This is lower than the usual industry standard of 50% or less for conforming loans. If you have a higher down payment or credit score, you may qualify for a jumbo loan with a higher DTI ratio.

Special Considerations For Jumbo Mortgages

1. Lenders May Require Cash Reserves

Lenders need to know that you can make consistent, regular payments on a jumbo loan. Your lender will ask you for bank statements to prove that you have money in the bank to keep up with payments. It’s not uncommon for lenders to ask jumbo borrowers to have up to 12 months’ worth of expenses in reserve before they can get a loan. 

Having cash in your bank account isn’t the only way to meet reserve requirements. Lenders may consider up to 70% of your retirement account as well, so you don’t need to cash out all of your funds to meet the reserve rule. In some cases, business and gift funds may also go toward your reserve requirements.

2. Closing Costs Are Higher

Closing costs usually range between 3% – 6% of your total home value, but jumbo loans have much higher closing costs than conventional mortgages. On a $500,000 mortgage, you can expect to pay between $10,000 – $25,000 in cash at the closing table.

3. Consistent Income

Lenders only offer jumbo loans to buyers who have a predictable and regular income. Lenders often ask to see up to 2 years’ worth of W-2s, tax documents and 1099s when you get a conventional loan. With a jumbo loan, your lender may ask for more documentation and proof that your income is unlikely to change after you get a loan.

4. Manual Underwriting

Jumbo loans are manually underwritten. A finance expert will go through your credit report, assets and bank statements with a fine-toothed comb and bring to light any past missteps. If you have a bankruptcy or foreclosure on your report, you’ll have a harder time getting a jumbo loan.

5. VA Funding Fee

This isn't necessarily unique to jumbo loans, but the VA funding fee will be higher on a jumbo loan on the basis of the increased loan amount, so it's something to plan for. Depending on factors including your down payment and whether it's your first-time using a VA loan, the funding fee is anywhere between 1.4 – 3.6% of the loan amount. The good news is in addition to covering it yourself, you can ask for a seller concession or you may be able to finance it into the loan.

The Bottom Line

Jumbo loans are large home loans that are higher than the conforming limits set by Fannie Mae and Freddie Mac. These mortgages are riskier than conventional or government-backed mortgages because they don't have insurance.

This means that if you default on a jumbo loan, the bank has to foot the bill. You can use a standard jumbo loan to buy many types of properties, though requirements may vary by lender.

Down payment requirements for jumbo loans are usually higher than conventional mortgages. Lenders also have higher standards when it comes to DTI ratios, credit scores and cash reserves with jumbo loan applications.

It’s important to consider every requirement before you get a jumbo loan. To go over your options in detail, feel free to speak with one of our Home Loan Experts at (833) 326-6018.

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Hanna Kielar

Hanna Kielar is an Associate Section Editor for Quicken Loans focused on personal finance, recruiting and personal loans. She has a B.A. in Professional Writing from Michigan State University.