What You Need to Know About Jumbo Loan Limits

If you’re trying to buy a high-dollar home, you may come up against some obstacles — especially if you aren’t paying cash for the home. It can be tough to get a home loan for homes with hefty price tags, but while it may take more work, it’s not impossible to pull off. You’ll just need a jumbo loan to do it.

Jumbo mortgage loans are loans that have higher maximum limits. Jumbo loan amounts may vary depending on where you live — what’s considered “jumbo” in one area like California, for instance, will differ in other areas like Indiana. In all cases, these limits exceed the limits that come with conventional and conforming loans, though.

When purchasing a more expensive home, you’ll need a jumbo mortgage to finance the larger loan amount. There are many similarities between traditional mortgages and jumbo mortgages, but there are also stricter application qualifications to be aware of. You should expect tougher requirements for things like your income, credit score and down payment — and you may face other hurdles, too — so you need to know what to expect before pursuing this type of loan.

What is a jumbo mortgage?

A jumbo mortgage is a home loan designed to finance a property that has a price tag above the normal loan limits. Government-backed agencies Fannie Mae and Freddie Mac are responsible for setting loan limits on conforming loans, like conventional and FHA loans, and the limits fall between $510,400 and $765,600 for 2020, depending on where the home is located.

If you want to buy a home that exceeds those limits, you may need a jumbo loan. Whether you live in a high cost area or are simply ready for a bigger house budget, a jumbo loan can help.

Like other types of home loans, you’ll find flexibility with the structure of a jumbo loan. You can apply for either a fixed-rate or adjustable-rate mortgage. Terms lengths are also flexible, such as 15 or 30 years. Additionally, a jumbo loan can be used for your primary residence or other types of homes, like investment properties or a vacation home.

Remember, though, that you’re borrowing a much larger amount for a jumbo loan compared to a conventional loan, so the eligibility requirements are much more stringent. While a conventional loan lets you make a down payment of as low as 3%, most jumbo lenders require a 20% minimum down payment. That could be even higher if you’re purchasing a second home or investment property.

[ More: What Is a Conventional Loan? ]

Credit score requirements are also higher for a jumbo loan. The average credit score for a jumbo mortgage is 740, but it can be lower or higher depending on the loan amount, size of the down payment and the type of property being purchased.

Lenders also review your debt-to-income ratio, just as they do with any other type of mortgage. You’ll need a larger income in order to support those higher monthly mortgage payments. Your lender may also require that you have more cash reserves to cover your expenses in case of a financial emergency.

In addition to stricter lending requirements, jumbo loan interest rates are also typically higher when compared to conventional mortgage rates.

What are the jumbo loan limits?

Jumbo mortgage limits vary based on the lender as well as your qualifications as a borrower. The minimum amount depends on the conforming loan limit for the county in which you’re house hunting. For instance, in 2020, most areas have a conforming loan maximum of $510,400. In most high cost areas, the limit jumps to $765,600. Anything above those limits would need to be a jumbo loan.

Jumbo loan limits aren’t set by the government. You need to find a lender that specializes in your price range instead. One lender may only offer loans up to $3 million, while another may allow you to borrow as much as $15 million or more. It will vary greatly depending on the lender.

How much down payment do you need for a jumbo loan?

Jumbo loans typically require a higher down payment compared to other loan options. In most cases, you’ll need a 20% down payment on a primary residence. If you’re buying a $1 million home, you would need to pay $200,000 up front. This gives the lender greater security against the risk they’re taking with such a large loan amount. It’s also harder for banks to sell non-conforming loans like jumbo mortgages, so the higher down payment gives them more incentive to issue the loan.

You may be able to find a lender that accepts a lower down payment, but remember that a low down payment makes your monthly payment much higher. Your income and cash reserves both need to be able to support that number.

[ Read: Why Do You Need a Down Payment, Anyway? ]

Other types of mortgages come with much lower down payment requirements. An FHA loan can be as low as 3.5% and a conventional loan can be as low as 3%. VA and USDA loans have zero-down payment options as well.

VA jumbo loans

A VA loan is different from a conforming loan, and new rules remove any limits on how much you can borrow. In other words, any VA loan can potentially be a jumbo loan. The amount you’re able to borrow is based on your VA entitlement. That’s the amount the VA will guarantee without you having to make any type of down payment.

For jumbo loans, the lender typically subtracts the entitlement amount from the purchase price to determine the amount of your down payment. For example, say you’re buying a house for $800,000 and your VA entitlement is $144,000. Rather than requiring a down payment on the full $800,000 (which comes to $160,000), your lender would only require a down payment on $656,000 (which comes to $131,200). You’re still paying the full $800,000, but this helps you save cash upfront with a lower down payment requirement.

Like all VA loans, you must meet the service eligibility requirements. Working with an experienced VA lender makes this process easier. They’ll help you obtain your Certificate of Eligibility (COE), which is necessary for any VA loan, regardless of the amount.

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