Jumbo Loan

What Is a Jumbo Loan?

A jumbo loan, also known as a jumbo mortgage, is a type of financing that exceeds the limits set by the Federal Housing Finance Agency (FHFA). Unlike conventional mortgages, a jumbo loan is not eligible to be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac.

Designed to finance luxury properties and homes in highly competitive local real estate markets, jumbo mortgages come with unique underwriting requirements and tax implications. These kinds of mortgages gained traction as the housing market recovered following the Great Recession.

Advantages of a Jumbo Loan

The primary advantage of a jumbo loan is that it allows borrowers to take out a mortgage that exceeds the limits put in place by the FHFA.

This limit varies by state—and even by county. The FHFA sets the conforming loan limit size for different areas on an annual basis. The limit for 2023 is set at $726,200 for most of the country. This is an increase of $79,000 from the 2022 limit of $647,200. For counties that have higher home values, the baseline limit is set at $1,089,300, or 150% of $726,200.

The FHFA has a different set of provisions for areas outside of the continental United States for loan limit calculations. As a result, the baseline limit for a jumbo loan in Alaska, Guam, Hawaii, and the U.S. Virgin Islands as of 2023 is also $1,089,300. That amount may actually be even higher in counties that have higher home values.

If you have your sights set on a home that costs close to half a million dollars or more—and you don’t have that much sitting in a bank account—you’re probably going to need a jumbo mortgage. And if you’re trying to land one, you’ll face much more rigorous credit requirements than homeowners applying for a conventional loan. That’s because jumbo loans carry more credit risk for the lender since there is no guarantee by Fannie Mae or Freddie Mac. There’s also more risk because more money is involved.

How a Jumbo Loan Works

Just like traditional mortgages, minimum requirements for a jumbo mortgage have become increasingly stringent since 2008. To get approved, you’ll need a stellar credit score—700 or above—and a very low debt-to-income (DTI) ratio. The DTI should be under 43% and preferably closer to 36%. Although they are nonconforming mortgages, jumbos still must fall within the guidelines of what the Consumer Financial Protection Bureau considers a “qualified mortgage”—a lending system with standardized terms and rules, such as the 43% DTI.

You’ll need to prove you have accessible cash on hand to cover your payments, which are likely to be very high if you opt for a standard 30-year fixed-rate mortgage. Specific income levels and reserves depend on the size of the overall loan, but all borrowers need 30 days of pay stubs and W-2 tax forms stretching back two years. If you’re self-employed, the income requirements are greater: two years of tax returns and at least 60 days of current bank statements. The borrower also needs provable liquid assets to qualify and cash reserves equal to six to 12 months of the mortgage payments. And all applicants have to show proper documentation on all other loans held and proof of ownership of nonliquid assets (like other real estate).

Jumbo Loan Rates

While jumbo mortgages used to carry higher interest rates than conventional mortgages, the gap has been closing in recent years. Today, the average annual percentage rate (APR) for a jumbo mortgage is often par with conventional mortgages—and in some cases, actually lower. As of July 21, 2023, Wells Fargo, for example, charged an APR of 6.699% on a 30-year fixed-rate conforming loan and 6.341% for the same term on a jumbo loan. 

Even though the government-sponsored enterprises (GSEs) can’t handle them, jumbo loans are often securitized by other financial institutions; since these securities carry more risk, they trade at a yield premium to conventional securitized mortgages. However, this spread has been reduced with the interest rate of the loans themselves.

Down Payment on a Jumbo Loan

Fortunately, down payment requirements have loosened over the same time period. In the past, jumbo mortgage lenders often required homebuyers to put up 30% of the residence’s purchase price (compared to 20% for conventional mortgages). Now, that figure has fallen as low as 10% to 15%. As with any mortgage, there can be various advantages to making a higher down payment—among them, to avoid the cost of the private mortgage insurance (PMI) that lenders require for down payments below 20%.

Who Should Take Out a Jumbo Loan?

How much you can ultimately borrow depends, of course, on your assets, your credit score, and the value of the property that you’re interested in buying. These mortgages are considered most appropriate for a segment of high-income earners who make $250,000 to $500,000 a year. This segment is known as HENRY, an acronym for high earners, not rich yet. Basically, these are people who generally make a lot of money but don’t have millions in extra cash or other assets accumulated—yet.

While an individual in the HENRY segment may not have amassed the wealth to purchase an expensive new home with cash, such high-income individuals do usually have better credit scores and more extensively established credit histories than the average homebuyer seeking a conventional mortgage loan for a lower amount. They also tend to have more solidly established retirement accounts. They often have been contributing for a longer period of time than lower-income earners.

These are just the sorts of individuals whom institutions love to sign up for long-term products, partly because they often need additional wealth management services. Plus, it’s more practical for a bank to administer a single $2 million mortgage than 10 loans valued at $200,000 apiece.

Special Considerations for a Jumbo Loan

Just because you may qualify for one of these loans doesn’t mean you should take one out. You certainly shouldn’t if you are counting on it furnishing you with a substantial tax break, for example.

You’re probably aware that you can deduct the mortgage interest you paid for any given year from your taxes, providing that you itemize your deductions. But you probably never had to worry about the cap that the Internal Revenue Service (IRS) places on this deduction—a cap that was lowered by the passage of the Tax Cuts and Jobs Act. Anyone who got a mortgage on Dec. 14, 2017, or earlier can deduct interest on up to $1 million in debt, which is the amount of the old cap. But for home purchases made after Dec. 14, 2017, you can only deduct the interest on up to $750,000 in mortgage debt. If your mortgage is larger, you don’t get the full deduction. If you plan to take out a $2 million jumbo mortgage that accrues $80,000 in interest a year, for example, you can only deduct $30,000—the interest on the first $750,000 of your mortgage. In effect, you only get a tax break on 37.5% of the mortgage interest.

This means that you should borrow with care and crunch the numbers carefully to see what you can truly afford and what kinds of tax benefits you will receive. With the state and local tax deduction limited to $10,000 a year, due to the same tax bill, a highly taxed property will also cost you more to own. One other strategy: Compare terms to see if taking out a smaller conforming loan plus a second loan, instead of one big jumbo, might prove better for your finances in the long haul.

The Bottom Line

A jumbo loan, also known as a jumbo mortgage, is a type of financing that exceeds the limits set by the Federal Housing Finance Agency (FHFA) and cannot be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac.

Homeowners applying for a jumbo loan must undergo more rigorous credit requirements than those applying for a conventional loan. Approval requires a stellar credit score and a very low debt-to-income (DTI) ratio. The average annual percentage rate (APR) for a jumbo mortgage is often par with conventional mortgages, while down payments are roughly 10% to 15% of the total purchase price.