When financing a home that requires a large amount of money, a jumbo loan is often necessary. But what exactly is a jumbo loan, and how can you qualify for one? Moreover, how does it stack up against conventional loan options?

We’ll explore everything you need to know about jumbo loans, including its definition, qualification requirements, and how its interest rates compare to conventional loans.

What is a jumbo loan?

A jumbo loan is a type of non-conforming mortgage loan that exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA). In 2023, a loan for a single-family home that exceeds $726,200 in most U.S. counties (and $1,089,300 in high-cost areas) is considered a jumbo loan.

Jumbo mortgages tend to have more stringent qualifying requirements than conventional loans as they cannot be purchased or guaranteed by Fannie Mae or Freddie Mac. However, the qualifying criteria and interest rates vary by mortgage lender and location.

Aside from those distinctions, jumbo loans aren’t much different from traditional conforming loans. Jumbo loans can be used for different property types, such as primary homes, vacation homes, and investment properties, and can have fixed or adjustable rates with various term options.

Jumbo loan requirements

The requirements and approval guidelines for jumbo loans may differ depending on the lender. However, in general, here’s what you can expect:

• • Credit score: To qualify for a jumbo loan, you may need a minimum FICO score of 700, which is much higher than the minimum required for a conventional or government-backed loan. Furthermore, some lenders may prefer a credit score of 740 or higher to approve you for a jumbo mortgage.
  • Down payment: Typically, a minimum down payment of 10% to 20% is required for a jumbo loan, with some lenders requiring as much as 30% down. However, the specific down payment amount will depend on your loan amount and credit score.
  • DTI ratio: You’ll need a low debt-to-income (DTI) ratio, which is your monthly debt payments divided by your gross monthly income, to qualify for a jumbo loan. Typically, jumbo lenders will not approve a DTI that exceeds 45%.
  • Cash reserves: It’s likely that you’ll be required to show that you have substantial cash reserves on hand to protect against unforeseen expenses or financial obstacles. The exact amount of cash reserves needed may vary by lender and could be influenced by factors such as your credit score, DTI ratio, and more. It’s not uncommon for lenders to ask jumbo borrowers to show proof of up to 12 months (or more) of cash or liquid assets.

Jumbo vs. Conforming Loan Rates

In the past, jumbo loans typically carried significantly higher interest rates than traditional conventional loans. However, recently, the disparity has decreased due to increased guarantee fees (or g-fees) for loans purchased by Fannie Mae and Freddie Mac, increased demand from investors, and other market factors.

With today’s rate environment favoring non-conforming loans, you can finance a larger and more valuable property with a lower interest rate compared to conventional options. For example, today’s average jumbo mortgage rate is set at 5.90%, whereas the average 30-year fixed rate is 6.32%. In other words, taking out a jumbo loan doesn’t mean taking out jumbo interest rates. In fact, you may even discover that jumbo rates are lower than conventional rates. Why settle for less when you can have more with a jumbo loan?

If you’re looking for a jumbo mortgage, Loan Pronto is here to help. Get a free rate quote or fill out our online loan application to get pre-approved.

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