What is a Jumbo Mortgage?
In short, a jumbo mortgage is any loan amount that exceeds the conforming loan limit for a county. The conforming loan limit is established each year by several mortgage organizations including the Federal Housing Finance Agency (FHFA). The conforming loan limit impacts mortgage program eligibility and the types of loans that lenders offer borrowers. The size of your loan and whether it is a jumbo mortgage is important for multiple reasons. Your loan amount affects your mortgage rate, closing costs, borrower qualification requirements and mortgage program eligibility, especially for no or low down payment programs. Simply put, a different set of guidelines apply to jumbo mortgages. Plus, not all lenders offer jumbo loans.
While the difference between jumbo and conforming mortgages can be relatively moderate, it is important for borrowers to understand how loan size impacts getting a mortgage. The better you understand how jumbo mortgages work the more likely you are to find the loan that is right for you.
The difference between jumbo and non-jumbo loans is not exactly black and white because the conforming loan limit varies by county. The conforming loan limit also varies by the number of units in the property with the more units, the higher the loan limit, up to four units. There is a general conforming loan limit but counties with higher housing costs have higher conforming limits. This is relevant because some lenders and mortgage programs apply the general conforming loan limit to determine if a loan is classified as a jumbo mortgage while other lenders and programs use the high cost loan limit for more expensive counties as the determining factor.
As a result, mortgages fall into three categories depending on loan size: conforming, conforming jumbo (also known as super conforming) and jumbo. Below, we outline the three mortgage size categories and review the loan limits that apply to each category. It is important that borrowers work with their lender at the beginning of the mortgage process to understand how their loan is classified and how that impacts their mortgage rate, closing costs and borrower qualification requirements.
- Conforming mortgage: In the 48 contiguous states, Washington D.C. and Puerto Rico, this is a mortgage with a loan amount below the general conforming loan limit which is $726,200 or less for a single unit property. In Alaska, Guam, Hawaii and the U.S. Virgin Islands this is a mortgage with a loan amount of $1,089,300 or less for a single unit property. The general conforming loan limit is higher for multi-unit properties.
- Conforming jumbo mortgage: Also called a super conforming mortgage, this is a mortgage with a loan amount greater than the general conforming loan limit but less than the loan limit for high cost areas (counties with higher average home prices). The maximum high cost conforming loan limit for a single unit property in the contiguous United States, Washington D.C. and Puerto Rico is $1,089,300. The conforming loan limit for some counties is between the general and maximum high cost conforming loan limit.
- Jumbo mortgage: Also known as a non-conforming jumbo loan, a jumbo mortgage has loan amount that exceeds the conforming loan limit for a county, including the high cost loan limits.
The table below outlines the conforming loan limits for general and high cost areas in the U.S. and selected territories. A mortgage amount that is greater than the limits presented in the table is a jumbo mortgage. Please note that loan limits vary by county.
- Use ourCONFORMING LOAN LIMIT CALCULATORto determine the mortgage limit for any county
As noted above, your loan amount is one of several factors, including your credit score, loan-to-value (LTV) ratio, loan term and mortgage type, that determines your mortgage rate. Regardless of loan type -- fixed rate, adjustable rate mortgage or interest only -- borrowers should expect jumbo mortgage rates to be .125% to .375% higher than conforming interest rates. In the past, lenders had assigned a higher risk level to larger loans so jumbo mortgage rates included a minor pricing premium.
Over the last several years, however, the rates for jumbo and conforming loans have been approximately the same for certain programs for long periods of time. This is because jumbo loan borrowers have been viewed as less risky and more attractive to lenders so jumbo mortgage rates fell in line with conforming rates and even dipped lower on several occasions.
It is important to note that lenders have more flexibility in setting loan terms and qualification guidelines for jumbo mortgages as compared to conforming loans. This results in greater variation in jumbo mortgage rates and provides more reason for borrowers to compare multiple mortgage quotes. Jumbo mortgages are provided by traditional lenders such as banks, mortgage banks, mortgage brokers and credit unions.
The table below compares rates and fees for jumbo mortgages. Because there tends to be a wider range in jumbo mortgage terms we recommend that you contact multiple lenders to find the loan with the lowest mortgage rate and closing costs. Shopping for your mortgage is the best way to save money on your loan.
The borrower qualification requirements for jumbo mortgages tend to be stricter than for conforming loans. In general, jumbo loans require a larger down payment and lower loan-to-value (LTV) ratio, higher borrower credit score and greater borrower reserves. This makes it more challenging to qualify for a jumbo mortgage.
Loan-to-Value (LTV) Ratio
Historically lenders have typically imposed stricter limits on the maximum loan-to-value (LTV) ratio for jumbo mortgages. The LTV ratio is the ratio of the loan amount to the value of the property you are financing. In the past, for jumbo mortgages, lenders have typically applied a maximum LTV ratio of 80% or even as low as 60% in some cases, depending on the loan amount, type of loan and mortgage program. For example, a lender may be willing to lend you $2 million but require a maximum LTV ratio of 60% in order to receive the lowest mortgage rate, so you are required to make a down payment of at least 40%.
Since 2014, however, some lenders have relaxed their qualification guidelines for jumbo mortgages and now allow LTV ratios up to 85% or 90% in some cases, although borrowers may pay a higher mortgage rate at higher LTV ratios. Please note that the higher LTV ratio limit usually applies to jumbo purchase mortgages while lenders apply a lower LTV ratio to refinances and an even lower limit for jumbo cash-out refinances.
By comparison, for conforming loans, lenders typically offer you their lowest mortgage rate if the LTV ratio is 80% or lower and borrowers are able to obtain loans with an LTV ratio of 97% or even 100% in the case of the VA and USDA mortgage programs.
Credit Score
Borrower credit score requirements for jumbo mortgages are usually higher than for conforming loans. Lenders typically require that jumbo mortgage borrowers have a minimum credit score of 700- 720 to receive their best loan terms although some lenders may permit lower credit scores. Lenders may apply lower LTV ratio and borrower debt-to-income ratio guidelines for borrowers with lower credit scores which can make it more challenging to qualify for a jumbo mortgage.
Borrower Reserve Requirements
Many jumbo lenders require that borrowers have six-to-nine months of total monthly housing expense (mortgage payment, property tax, homeowners insurance plus other applicable housing-related expenses) as savings in reserve when the loan closes. The borrower reserve requirement varies by lender, loan amount, loan type and mortgage program. Borrowers with lower credit scores may be required to have higher reserves. Be sure to understand a lender's reserve requirement for a jumbo mortgage to ensure that you have sufficient funds to qualify for the loan.
Use the FREEandCLEAR Lender Directory to find top-rated lenders that offer jumbo mortgages.
Most no or low down payment mortgage programs including the HomeReady, Fannie Mae 3% Down / 97% LTV ratio, FHA and VA programs only allow loan amounts below the conforming loan limit so jumbo mortgages are not eligible for these programs. In some cases borrowers may choose to get a second mortgage so that their first mortgage does not exceed the conforming loan limit. For example, if you need a $900,000 mortgage to buy a home but your loan program only permits loans below the conforming limit, you could get a $726,200 first mortgage and a $173,800 second mortgage for total loan proceeds of $900,000. In this case, using a second mortgage allows borrowers, who needs a jumbo loan, to reduce their first mortgage so that they are eligible for certain programs.
Sources
"Loan Limits." Originating & Underwriting. Fannie Mae, 2023. Web.
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