What Is a Jumbo Loan?

The cost of a home can vary dramatically from one city or a state to another. Just take the average price of a home in Lancaster, California, into account. The cost of a home in Lancaster is $320,494, but if you drive 50 miles west toward the coast, you’ll find that the median home price in Santa Monica, California, is nearly $1.7 million.

As with homes, not all mortgages are created equal. Most people will never require a home loan for $1 million. Banks recognize this and set limits on standard mortgages. Anything over that set limit requires a jumbo home loan for a larger amount. But what is a jumbo mortgage, exactly — and how does this type of loan work? Read on to find out.

What is a jumbo loan?

The main difference between a conventional loan and a jumbo loan is the limit. Jumbo loans have higher limits for more expensive purchases — they’re basically a super-sized mortgage for individuals who are buying more expensive real estate.

Conventional loans max out at a certain amount, and that’s where jumbo loans come into play. Each year, limits are set to meet current home values. According to the Federal Housing Finance Agency (FHFA), the 2020 conventional mortgage limit in most of the U.S. for one-unit houses is $510,400, up from the 2019 loan limit of $484,350.

There are areas where the maximum conventional loan limit is higher at $765,600, but that is limited to places like Los Angeles, San Francisco and New York City, where housing costs are sky high.

Let’s say you’d like to buy a home in Las Vegas or San Francisco. If you’d like to buy a $600,000 home in Las Vegas and are only putting $15,000 down, you’d need a jumbo loan because the total amount you’re borrowing is over the conventional loan limit of $510,400.

If you’d like to buy a $600,000 loft in San Francisco with $15,000 down, on the other hand, you could get a conventional loan because the limits for conventional loans are higher in areas like this. Excluding areas like San Francisco, though, any mortgage loan amount of more than $510,400 will be classified as a jumbo loan.

How to get a jumbo loan

It’s not as easy to get a jumbo loan as a conventional loan. Jumbo mortgages have different requirements than conventional loans — and you have to meet stricter lending requirements to qualify. That’s because jumbo loans aren’t backed by federal programs such as Fannie Mae, so most mortgage lenders are more cautious about issuing them since they’re on the hook in case of default.

To get a jumbo loan, you’ll likely need a higher credit score than you would for a conventional loan. Your best chances for success are having a credit score of 700 or higher. You’ll also likely be required to put down more money as a down payment to acquire a jumbo loan. When it comes to jumbo loans, you can expect to pay at least 20% to get approved in many cases.

If you’re planning on buying a high-value property, having a clean credit report and a sizable down payment isn’t always enough. You’ll also need to show that you have cash reserves, steady income and very little debt. Banks don’t have the weight of the U.S. government to back them, so they’re more cautious about approving jumbo loans.

You can also expect to fill out more paperwork and hand over more documents with a jumbo loan so that the lender can perform its due diligence during the loan process.

Jumbo loan limits

Jumbo loans in 2020 start at any amount above $510,400 in most areas, and above $765,500 in areas with higher-value properties.

There are also other rules and limitations you should know about before you take out a jumbo loan, including:

• You may need to get a second appraisal on the property. Banks are extra cautious about lending you money without the government backing they get on conventional loans.
• You’ll need a credit score of at least 680 to qualify in most cases.
• Your debt to income ratio, which measures how money goes toward your current debt each month, should be low.
• Jumbo loan rates are usually higher than conventional loan interest rates.
• You’ll need to pay 20% down or more for this type of loan.
• You’ll need to show that you have cash reserves in the bank (down payment not included).

Should I get a jumbo loan?

If you’re wondering if getting a jumbo loan is worth it after reading the requirements and limitations, don’t entirely rule this loan out.

A jumbo loan is a good idea if:

• You’re interested in buying a higher-value house
• You have good credit
• You have enough cash to put 20% down on the house and still have cash reserves

Before you decide to go and purchase a high-value house that can only qualify for a jumbo loan, it’s important to weigh the costs and benefits. The first question you need to ask yourself is whether you need this house and can afford it. If you’re buying in a high-cost area, you may not have cheaper options.

You should also ask yourself a few other questions, too. Does the house have the potential to increase in value? Can you afford the mortgage payments? Will you still be able to set money aside for home maintenance and repairs? Can you still take off for a two-week vacation without feeling strapped for cash? Be honest with your answers — it’s the only way to know whether you’re making the right move.

You also need to run numbers on the house to see what your monthly mortgage payments would be. Don’t forget to include taxes and insurance in your monthly budget calculations. Whether you have a jumbo or conventional loan, how much you can afford is the most important factor.

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