The simple guide to how jumbo mortgages work

If you’re thinking of purchasing an expensive property and you have a large down payment, then a jumbo loan may be right for you.Jumbo Mortgages

Whether you intend to buy a luxury house or you’d like to settle down in an area with high property values, a jumbo loan may help you step into the high-end property market. Although jumbo loans enable you to access more money, they are typically more expensive due to the high risk involved, and they can be harder to qualify for compared to conventional mortgages.

What is a jumbo mortgage?

A jumbo mortgage is a mortgage product that has a higher lending limit than conforming loan, as governed by Fannie Mae and Freddie Mac, which form part of the US Federal Housing Finance Agency. In the US, the limit on conforming loans is $417,000 for all states (excluding Hawaii and Alaska) — jumbo mortgages exceed this limit.

Because there is often a high risk attached with borrowing more money, lenders will charge a high interest rate. You’ll likely face stricter underwriting and larger down payment requirements due to the size of the loan.

Jumbo loans are available for primary residences, vacation homes and investment property types. Fixed or adjustable rates are available.

Is a jumbo loan right for me?

If you’re thinking of purchasing an expensive property and you have a low debt-to-income ratio, a high credit score and a large down payment, then a jumbo loan may be right for you. Jumbo loans are better suited to high income earners that have good credit history and financial discipline.

Pros and cons of a jumbo loan

Pros

  • Access to significant funds. A major benefit of a jumbo loan is that you can access a substantial amount of funds that exceed the limits of a conforming loan. This means you can more easily purchase a luxury or highly valued property.
  • Convenience. With a jumbo mortgage, you don’t have to take out two or more loans. Instead, you can just manage the one mortgage.
  • Different rate programs. You can choose from a fixed or an adjustable rate, which provides you with the flexibility to structure the loan in a way that suits you.

Cons

  • Higher interest rate. Due to the higher degree of risk to the lender, banks will normally charge an interest rate that is 0.5% to 1.5% higher than a traditional loan.
  • Market risk. If your property falls in value, you’ll lose equity in your home, which could be problematic as jumbo loans typically come with higher interest rates.
  • Stricter credit requirements. It’s more difficult to be approved for a jumbo loan compared to a standard mortgage. You need to provide evidence that you have the income to afford this type of loan. If you have a credit score lower than 600, you will probably have to put down a larger down payment to offset the risk.
  • Difficult to refinance. Jumbo loans can be difficult to refinance during the loan term. This means that if you have a fixed interest rate you may find it difficult to refinance with another lender to take advantage of a lower rate.

What’s the difference between a jumbo and a conventional loan?

The main difference between a jumbo mortgage and a conventional mortgage is that there’s a much larger market for conventional mortgages compared to jumbo loans. Consequently, jumbo loans represent a higher risk to the lender, therefore come with higher interest rates and costs.

Is a jumbo mortgage risky?

Generally, a jumbo mortgage is considered riskier than other types of mortgages because they’re not regulated by Freddie Mac or Fannie Mae. The loans are often larger, require a bigger down payment and cost more, making them a risky loan. However, in recent years, the spread in interest rates between jumbo and traditional loans has reduced.

Will I qualify for a jumbo mortgage?

To qualify for a jumbo mortgage you’ll generally need to meet the following criteria:

  • Good credit history. You will typically need a FICO score of 700 or higher. You need to show that you have at least six months worth of recent mortgage payments in the bank account.
  • Income and assets. When you apply for a jumbo loan, you’ll need 20% of the loan value as a down payment. The lender will therefore need to see evidence of your employment, earning potential, and assets to ensure that you can repay the loan.

Do I have to pay mortgage insurance?

Private mortgage insurance (PMI) is insurance you purchase to protect the lender in case you default on your loan on a conventional loan. However, there is no PMI within the jumbo loan industry, which means you will most likely need to complete a payment of 20% — higher compared to standard loans.

Frequently asked questions about jumbo mortgages

Jumbo mortgage loans typically require a down payment of more than 20%.

Jumbo mortgage loan limits vary from $417,000 to $3 million, depending on the program. The highest FHA jumbo loan as of now is $729,750.

Anywhere from $417,000 to $625,500 depending on the county.


Image: ShutterStock

Was this content helpful to you? No  Yes

Ask an Expert

You are about to post a question on finder.com:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder only provides general advice and factual information, so consider your own circumstances, read the PDS or seek advice before you decide to act on our content. By submitting a question, you're accepting our Terms and Conditions and our Privacy Policy.