Getting to a point in your life where you can buy the house of your dreams is an exciting time. But if you have your eyes set on a luxury home, you may need to borrow an amount higher than standard mortgages offer. That’s where a jumbo loan comes in. Here, we explain what a jumbo mortgage is, how it works and the pros and cons of taking one out.
In This Article
What is a jumbo loan?
Jumbo loans are mortgages for expensive homes that require a loan amount that exceeds conforming loan limits. Conforming loan limits are set by the Federal Housing Finance Agency (FHFA) and vary depending on the units in the home and where it’s located.
For most areas, the ceiling is $726,200 for a single-family home, but in luxury markets like Hawaii, that limit is $1,089,300, according to Fannie Mae. Say you want to buy a single-family home in Fulton County, Georgia, listed for $850,000 with $90,000 down. The financing you need is greater than the limit for conforming loans, and you could explore jumbo mortgage options to make the purchase.
How does a jumbo loan work?
Jumbo loans work like other mortgages. However, credit score, income and down payment requirements are generally higher because you’re borrowing a larger sum.
Jumbo loan rates may also be higher than conventional loans since they are riskier types of loans for lenders to make. Lenders can sell conforming loans to government entities, freeing up funds for them to make other loans. Jumbo loans, on the other hand, can’t be sold in the same way because they don’t meet government-set loan limits.
Besides those differences, jumbo loans can have fixed interest rates or variable interest rates like other mortgages. The steps for applying for a jumbo loan are also similar — you apply, and lenders will look at your finances during underwriting to make an approval decision.
The pros and cons of a jumbo loan
Before taking out a jumbo loan, consider these pros and cons:
- High loan amounts. Lenders typically offer jumbo loans capped at $2 million to $3 million; however, some offer up to $30 million, which can help you buy a luxury home.
- Flexible loan options. Jumbo loans have a range of loan terms to customize payments based on your goals. Interest can be fixed, or you could choose an adjustable-rate mortgage (ARM), where your rate is fixed for a certain number of years before adjusting.
- Financing for multiple property types. Jumbo loans may be used to buy a primary residence, vacation home or investment property.
- Equity building opportunity. If you chose a jumbo loan with a shorter fixed rate (15- or 20-year), you could build home equity quicker than a 30-year loan. This can be beneficial if you eventually decide to sell your home or take out a home equity loan (HELoan) or home equity line of credit (HELOC).
- Higher closing costs. Closing costs are fees required to process a mortgage and typically cost 3% to 6% of a loan. This means you’ll pay more the higher your jumbo loan is. For example, closing costs for a $3,000,000 loan could cost $90,000 to $180,000.
- Higher down payment requirements. You may be required to put 10% to 20% down or higher on a jumbo loan, whereas some conventional loan programs allow as little as 3%.
- Higher interest rates. Because jumbo loans are riskier to offer, lenders may charge higher interest rates, making the loan more expensive over time.
How to qualify for a jumbo loan
The first step for getting a jumbo loan is looking for lenders that offer jumbo loans and comparing interest rates, terms and costs. Eligibility requirements for jumbo loans can vary. Below is an overview of general jumbo loan requirements.
As mentioned, a 10% or higher down payment may be required for a jumbo loan. For example, a $950,000 home would require $95,000 down, and for a $1,000,000 home, you would need $100,000 down. However, bringing even more money to the table could decrease your interest rate.
Lenders may look for jumbo loan borrowers to have good to excellent credit which is 670 or higher on the FICO scale, according to Equifax. The higher your score, the better your chances of getting approved for a jumbo loan with a competitive rate. There’s less flexibility here compared to other conventional loans, where you may be able to qualify with a score of at least 620.
Similar to other types of mortgages, lenders will review your income to confirm you can keep up with mortgage payments for the amount you borrow. Documents like pay stubs, tax returns and financial statements may be used as evidence of consistent income.
Lenders will check your debt-to-income (DTI) ratio to determine if you have the cash flow to take on another loan. Your DTI is a percentage that shows how much of your current monthly income goes to monthly debt obligations, and the lender could require a DTI lower than 45%.
A cash reserve is the money you have left over after making a home purchase. Lenders may want to see that you’ll have 12 months of cash reserves left over after closing, so the cash you have saved up for a down payment and closing isn’t all you’ll need. You’ll also need more money socked away as a financial cushion.
Should you take out a jumbo loan?
Buying a home is a major purchase, especially when you’re buying a luxury property. Whether taking out a jumbo loan makes sense depends on your goals and finances.
Before rate shopping, check your credit score and confirm that you have enough cash saved for the down payment, cash reserves and closing costs. If that financial checkup shows you have the resources to buy your dream home, a jumbo loan can make the purchase a reality.
Written by Taylor Medine | Edited by Rose Wheeler
Taylor Medine is a writer who’s covered personal financial topics from budgeting and saving to paying down debt for more than eight years. She got her start demystifying intimidating money topics for the everyday consumer on a personal blog, and has since been published on Experian, Forbes Advisor, Credit Karma, and more.
Eligibility for a home equity loan or HELOC up to the maximum amount shown depends on the information provided in the home equity application. Depending on the lender, loans above $250,000 may require an in-home appraisal and title insurance. Depending on the lender, HELOC borrowers must take an initial draw of the greater of $50,000 or 50% of the total line amount at closing, except in Texas, where the minimum initial draw at closing is $60,000; subsequent HELOC draws are prohibited during the first 90 days following closing; after the first 90 days following closing, subsequent HELOC draws must be $1,000, or more, except in Texas, where the minimum subsequent draw amount is $4,000.
The amount of time it takes to get funds varies. It is measured from the time the lender receives all documents requested from the applicant and depends on the time it takes to verify information provided in the application. The time period calculation to get funds is based on the first 4 months of 2023 loan fundings, assumes the funds are wired, excludes weekends, and excludes the government-mandated disclosure waiting period.
For Texas home equity products through Prosper, funds cannot be used to pay (in part or in full) non-homestead debt at account opening.
Depending on the lender, qualified home equity applicants may borrow up to 80% – 95% of their primary home’s value and up to 80% – 90% of the value of a second home. In Texas, qualified applicants may borrow up to 80% of their home’s value. HELoan applicants may borrow up to 85% of the value of an investment property (not available for HELOCs).
Home equity products through Prosper may not be available in all states.
All home equity products are underwritten and issued by Prosper’s Lending Partners. Please see your agreement for details.
Prosper Marketplace, Inc. NMLS# 111473