What is a jumbo loan?

A jumbo loan is a home loan for more than the conforming limit set by Fannie Mae and Freddie Mac. Interest rates on jumbo loans are comparable to rates on conforming loans. One main reason: Lending standards for jumbo loans tend to be stricter, with larger down payments required.

Home prices have shot up in some areas of the U.S. to the point where buyers need jumbo loans to finance them. In mortgage speak, jumbo refers to loans that exceed the limits set by the government-sponsored enterprises that buy most home loans and package them for investors.

Jumbo mortgages, or jumbo loans, are those that exceed the dollar amount loan-servicing limits put in place by GSE’s Freddie Mac and Fannie Mae. This makes them non-conforming loans.

As of 2018, these limits are $453,100 in all states except for Alaska, Guam, Hawaii, and the U.S. Virgin Islands where the limit is $679,650. The conforming limit is higher in counties with higher home prices, so be sure to check your area’s loan limits.

The maximum loan amount varies by lender. Borrowers can get fixed- or adjustable-rate jumbo mortgages with various term options. The mortgages can be used for primary homes, as well as for investment properties and vacation homes.

How to qualify for a jumbo mortgage

Jumbo lenders usually have stricter underwriting guidelines. The main reason for this is that they’re not backed by Fannie or Freddie, so they’re riskier loans. On the flip side, lenders have more to gain since the dollar value is higher and they can offer additional services to these wealthier customers.

The three common hurdles borrowers must clear to get jumbo-loan approval are larger income, higher credit scores and greater reserves.

To consider a jumbo loan the FICO scores have to be higher. The average is around 740, although some have been a bit lower.

Borrowers whose scores fall beneath the normal requirements usually have to offset it with a low debt-to-income ratio.

Borrowers should be prepared to show enough reserves, or assets, to cover between six and 12 months’ worth of mortgage payments. The down payment on jumbo loans are, on average, between 10 and 20 percent.

Anything lower than a 10 percent down payment and you’re probably going to pay for it in higher rates.