Jumbo Loans

Your loan amount is above the conforming limit and now everything is different -- the requirements, the rates, the documentation your lender wants to see. Jumbo loan requirements exist because the government-backed machinery that handles most mortgages stops at a specific dollar threshold. Once you cross it, you are in a different market with different rules. Understanding what is a jumbo loan and what changes above the conforming loan limit helps you decide how to structure your financing and which lenders to approach.

The Conforming Loan Limit and Why It Exists

Fannie Mae and Freddie Mac buy mortgages from lenders, package them into securities, and sell them to investors. This process creates a liquid secondary market that lets lenders offer competitive rates on standardized loans. Fannie and Freddie will only buy loans up to a specified size -- the conforming loan limit -- which stands at $766,550 for most of the US in 2024, and up to $1,149,825 in high-cost areas like parts of California, New York, and Hawaii.

Loans below that limit move through a well-established, competitive market. Loans above it do not. Lenders hold jumbo loans on their own balance sheets or sell them to private investors, which changes both how they underwrite them and what they charge.

What Changes When Your Loan Is Jumbo

Lenders absorb more risk on jumbo loans, and they respond by tightening every qualification standard. Here is what typically changes:

• Credit score: Most jumbo lenders require 700 or higher. Many want 720 or above. A 680 score that breezes through conventional underwriting may not clear the jumbo floor at all.
• Down payment: Typically 10 to 20 percent minimum. Zero down is not available on jumbo loans.
• Debt-to-income ratio: Often capped at 43 percent and sometimes lower. Some lenders want 38 percent or below for large loan amounts.
• Cash reserves: Lenders want to see six to twelve months of mortgage payments in liquid savings after closing. Not before closing -- after. This is the jumbo lender's version of a stress test: can you keep paying if your income stopped tomorrow? Conforming loans rarely require this.
• Documentation depth: Expect more detailed scrutiny of every income source, asset account, and business financial if you are self-employed.

Jumbo Mortgage Rates: Not Always What You Expect

Historically, jumbo rates ran 0.25 to 0.50 percent above conforming rates. In certain rate environments, particularly when institutional investors aggressively seek high-quality jumbo paper, jumbo rates have run at or below conforming rates for borrowers with strong profiles.

The variability is the point. Rate spreads between jumbo lenders are typically wider than in the conforming market. Shopping three or more lenders is more important for a jumbo loan than for any other loan type -- not less.

The Math on Staying Below the Limit

If your loan amount sits slightly above the conforming limit, a larger down payment can drop you below it and bring you back into the conventional underwriting world. On a $790,000 purchase:

• 5 percent down leaves a loan of $750,500 -- below the $766,550 limit, standard conforming terms apply
• 3 percent down leaves a loan of $766,300 -- right at the boundary
• 2 percent down leaves a loan of $774,200 -- above the limit, jumbo requirements apply

A two to three percentage point increase in your down payment can be the difference between conforming rates and jumbo rates, easier qualification requirements and stricter ones, and a much broader set of willing lenders.