To buy an expensive home or live in an expensive location, many home buyers have to spend a lot of money. They need a jumbo loan.
Most mortgage programs have strict government-imposed loan limits that change annually and vary by location, but are generally capped at just under $1 million. If you're after a more expensive property, you'll need to use a jumbo loan instead.
Not all lenders offer jumbo mortgages, but those that do have much higher limits: Chase, for example, offers jumbo loans up to $9.5 million; Bank of America offers $5 million.
Need a bigger loan to buy a home? Here's what you need to know about jumbo loans, how much they cost, and how to get one.
What is a jumbo mortgage?
Lenders offer jumbo mortgages to borrowers who need more than the federal loan limit. In 2024, someone seeking at least $766,550 to buy a home would need a jumbo loan, or $1,149,825 in high-cost areas. (The limit is updated annually to reflect changes in the average home price.)
2024 Loan Limit Range Market Examples $766,550 Indianapolis, Minneapolis exactly $766,551 to $862,500 Boston, Concord, New Hampshire $862,501 to $943,000 Nashville exactly $1,149,825 New York City, San Francisco exactly
Federal Housing Finance Agency
How to Qualify for a Jumbo Loan
Because government-backed mortgage investors Fannie Mae and Freddie Mac won't buy these loans, lenders are forced to hold them on their balance sheets and take on extra risk. As a result, lenders require borrowers to pass higher hurdles to qualify for a jumbo loan.
“When chefs eat their own food, they become a lot more picky about the ingredients,” says Greg McBride, chief financial analyst at personal finance website Bankrate.
Credit score
First, jumbo loan borrowers need a higher credit score than is required for a government-insured loan, typically above 700. By comparison, borrowers seeking a government-insured VA loan, FHA loan, or conforming loan can typically qualify with a credit score in the high 500s to low 600s.
Debt-to-income ratio
A borrower's debt-to-income ratio (DTI) compares a borrower's debt to their total income and typically cannot exceed 43%. Conforming loan borrowers' DTI can reach 50%.
Down payment and cash reserve
Jumbo loan customers may also require a larger down payment, often more than 20% of the purchase price. Conforming loan borrowers can require a much smaller down payment, sometimes as little as 3%. Jumbo loan borrowers must also demonstrate that they have sufficient cash reserves to cover six to 12 months of mortgage payments, including property taxes, homeowners insurance, and homeowners association (HOA) dues.
Do jumbo loans come with jumbo mortgage interest rates?
Just qualifying for a jumbo loan can be tough, but then the reality of rising interest rates sets in. According to Bankrate, as of mid-December 2023, the average interest rate for a 30-year fixed-rate jumbo mortgage was 7.37% for borrowers with a credit score of 740. That's slightly higher than the average interest rate of 7.03% for conforming loans.
But that's not always the case. Sometimes, interest rates on jumbo loans are lower than those on conforming loans because stricter qualification requirements for jumbo loans reduce the risk that a borrower will default. But even when rates are similar, jumbo borrowers “still end up paying more over the life of the loan,” says Jacob Channell, senior economist at LendingTree, an online mortgage marketplace.
20% Home Price Down Payment Monthly Payment (includes taxes and insurance)*$975,000$195,000$5,385$1.2 million$240,000$6,627$1.5 million$300,000$8,284$2 million$400,000$11,045
In other words, the principal and interest payments on a $2 million loan at 6.75% interest rate would be more than what you'd pay on a $500,000 loan at 7% interest rate over a 30-year term.In fact, the high interest rates are scaring some buyers away, says Andy Wagner, co-director of Nations Lending in San Diego.
For example, Wagner explains, a hypothetical couple living in a $1 million home with a 2.7% interest rate is making monthly payments of $4,000. If they sold it to buy a $2 million home at current interest rates, their monthly payments could jump to $9,500. So rather than give up on the historically low interest rates, the couple decides to hold out until rates come down.
Tips to Save on a Jumbo Loan
With a few smart strategies, homebuyers needing a big mortgage can cut costs.
ARM Today, Refinance Later
In the jumbo loan market, adjustable rate mortgages tend to be more popular than conforming loans. Adjustable rate mortgages initially offer lower interest rates than fixed rate mortgages, but after a set period (such as five or seven years), the interest rate adjusts to prevailing rates.
Bankrate's McBride said large adjustable-rate loans are typically purchased with the intention of refinancing the loan, paying it off early or even selling the property before rates reset.
Michael P. DeSantis, broker-president of American Mortgage Resources in Massachusetts, advises clients to choose an ARM only if they plan to refinance before rates reset. “Anything can happen,” he says. “You don't want to be in a situation where your rate readjusts two points in the sixth year.”
So while ARMs aren't “evil,” they are inherently riskier than fixed-rate loans, Channell said.
“Some people say sell your home before interest rates adjust, but in some markets it's hard to sell a home,” he points out. “If you're considering an ARM, make sure you have enough room in your budget in case interest rates go up.”
Buy mortgage points
Lenders often allow borrowers to “upfront purchase points” to lower their interest rate. One mortgage point costs 1 percent of the total loan amount. So on a $1 million loan, one point equals $10,000. Typically, purchasing one point lowers your interest rate by 0.25%, which can add up to a big savings for borrowers who plan to live in their home for a long time.
But after meeting cash reserve requirements and making a large down payment, jumbo borrowers may have a hard time coming up with additional cash. Plus, when the sale of the home closes, borrowers usually owe additional money for closing costs and, in some areas, mansion taxes.
However, you don't necessarily have to pay for the points yourself: You can negotiate with the home seller or agent to pay for the points, or if you're building a new home, your home builder may offer to buy the points for you.
Improve your credit score
Increasing your credit score may be necessary just to meet a lender's requirements for a jumbo loan. But a higher credit score can also help you lower your interest rate.
Most consumers can check their credit score using their bank or credit card dashboard. Late payments and large credit card debt can lower a credit score. But over time, consumers can improve their score.
It takes years to build up a credit score, but in the short term, some consumers can improve their situation by paying down credit card debt, says Lani Farouz, branch manager at Nations Lending in San Diego.
If you think there's an error on your credit report, Farlows says you should call the creditor directly and ask for a letter outlining the error. You can then send a copy of the letter to the three credit bureaus (Equifax, Experian, and TransUnion) and they'll rescore it within 30 to 60 days. Alternatively, you can give the creditor's letter to your mortgage lender and request a “fast rescore,” which will correct the borrower's credit report within a few days.
You can also try reducing your debt (ideally to 30% or less of your total credit limit) and putting your bills on automatic payment (a history of on-time payments plays a big role in your credit score).
Because jumbo loans are at the lender's discretion, interest rates and terms vary widely, so it's worth shopping around to find the best rate.
First, ask if the bank offers any discounts to new or existing customers. Depending on the lender, they may even reduce interest rates by 0.125 to 0.50 percentage points for customers with large savings or investments.
Still, “banks can be more or less enthusiastic or apathetic depending on whether they want to stay competitive, so it never hurts to shop around,” says Guy Cecala, executive chairman of industry publication Inside Mortgage Finance. He recommends using a mortgage broker, who will find the best loan options based on your situation. “You don't have to pay for their services,” Cecala adds.
When shopping for a jumbo loan, consider more than just the interest rate. For example, Chase offers the highest jumbo loan limits (up to $9.5 million), which is one of the reasons Buyside named it the Best Jumbo Mortgage Lender. Bank of America also gets high marks for its low closing costs. According to Inside Mortgage Finance, the top three lenders by jumbo loan volume in 2022 were Wells Fargo, Chase, and Bank of America.
Of course, there are many other jumbo loan providers out there, some of which you may not have heard of, so as the saying goes, choose wisely.
—Additional reporting by Aly J. Yale
Meet Contributor Beth DeCarbo
Beth DeCarbo is a WSJ Buy Side contributor.