What is a jumbo loan?

Key points

• Jumbo loans are mortgages that exceed the limits set by the Federal Housing Finance Agency and thus can’t be purchased by Fannie Mae or Freddie Mac.
• In most parts of the country, a jumbo loan is a home loan that’s larger than $647,200, though some counties have higher limits.
• Because jumbo loans are so big, lenders typically have more stringent borrowing requirements than they do for conventional conforming mortgages.

As the name implies, a jumbo loan is a loan for a large amount of money. More specifically, it’s a type of mortgage that exceeds the limits set by the Federal Housing Finance Agency (FHFA).

For most of the country, a jumbo loan is any mortgage larger than $647,200, but the threshold is higher in certain high-income counties.

Borrowing a jumbo loan can help you finance a primary home, vacation home or investment property, but the requirements to qualify can be stricter than the ones for a conventional conforming mortgage.

What is a jumbo loan?

A jumbo loan is a type of non-conforming home loan for an amount that’s higher than the limits set by the FHFA. This amount is set on an annual basis, and it can vary by location.

“As of 2022, the one-unit conventional max loan amount is $647,200 for more than 99% of the U.S.,” says Texas-based mortgage loan officer Christopher Shoemaker. “There are some specific counties which are ‘high-cost counties’ with higher limits.”

In Washington, D.C. and San Francisco, for instance, you reach jumbo loan territory if your home loan is higher than $970,800. That cutoff also applies to areas outside of the continental U.S., including Alaska, Guam, Hawaii and the U.S. Virgin Islands.

Because jumbo loans exceed the FHFA limits for conforming mortgages, they are not eligible for purchase by Fannie Mae or Freddie Mac, two government-sponsored enterprises that buy most home loans. Lenders have to assume greater risk when approving jumbo loans, so they tend to have more stringent underwriting guidelines as a result.

How does a jumbo loan work?

A jumbo loan can be used to finance a home purchase. As the homebuyer, you’ll provide a down payment upfront and use your jumbo mortgage to cover the rest. Then, you’ll pay back the mortgage over a set period of time, typically 15 or 30 years, with monthly payments.

Let’s say, for example, that you’re purchasing an $800,000 home and putting down $100,000, or 12.5%, upfront. If you borrow a jumbo loan of $700,000 at a fixed APR of 5%, you can expect to make monthly payments of $3,757 over 30 years. Over that time period, you’ll pay $653,146 in interest charges.

Note that your monthly payment will be even higher than this amount due to additional charges, such as homeowners insurance, taxes and private mortgage insurance (PMI) since, in this example, your down payment is less than 20%.

Jumbo vs. conventional home loans: What’s the difference?

Jumbo home loans work similarly to conventional conforming mortgages — they just come in higher amounts. You can typically choose repayment terms of 15 or 30 years and select a fixed or adjustable interest rate.

Lenders typically offer similar rates on jumbo loans as they do on conventional mortgages. As of September 2022, Wells Fargo offered an even more competitive rate on jumbo loans than conventional mortgages — 4.855% APR on a 30-year fixed-rate jumbo loan vs. 5.557% APR on a 30-year fixed-rate conforming loan.

While jumbo loans aren’t that different from conventional mortgages, they can be tougher to qualify for.

“A jumbo loan works similarly to a conventional loan in how you apply for it, but since it is a higher size loan, investors are typically more rigorous with their credit and income requirements,” says Shoemaker.

Some mortgage lenders will require a minimum credit score of 700 or 720 to get a jumbo loan. Others may ask for a large down payment (10% to 30%), several months of cash reserves, a higher-than-average income or a particularly low debt-to-income ratio.

Pros and cons of jumbo loans

The main advantage of a jumbo home loan is that it lets you borrow more than you can with a conventional conforming mortgage. If you want to take out $750,000 to buy a $1 million home, for instance, a jumbo loan could make that possible.

Some homebuyers are able to afford a large mortgage, but not purchase a home outright in cash. Others might have the means to buy in cash but prefer to finance their home purchase with a loan as part of their overall investment strategy. A jumbo loan allows these homebuyers to finance a pricey home at a competitive interest rate that may be even lower than the rate they’d get on a conventional mortgage.

At the same time, a jumbo loan can be a significant debt burden, and borrowers run the risk of foreclosure if they can’t pay it back. They also need to have strong financial credentials to qualify in the first place, since lenders often have strict approval criteria. As mentioned, lenders may require a higher credit score, lower DTI ratio and more extensive cash reserves for a jumbo loan than for a conventional home loan.

Another con worth considering is the limited tax break you might get on a jumbo loan. The mortgage interest deduction is capped at $750,000 for new mortgages, so you won’t be able to deduct the interest you pay on higher loan amounts. Instead of getting a tax break on all the mortgage interest you pay, you might only get a break on a portion of it.

PROS	CONS
Allows you to borrow past the limits of a traditional mortgage	May have stricter requirements for credit and income
Offers competitive interest rates that may be even lower than the ones on a conforming home loan	Often calls for cash reserves that can cover several months of payments
Gives you the opportunity to buy a more expensive home or investment property	Doesn’t qualify for the mortgage interest tax deduction past $750,000

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