Jumbo loans: Definition, rates and what to consider

Many buyers use a mortgage to finance their home purchase. But did you know that mortgages backed by government-sponsored enterprises (GSEs) have limits on how large they’re allowed to be? Mortgages can still exceed those limits. But they can’t be backed by GSEs. And they may have different requirements, too. 

These mortgages are called jumbo loans. Here’s what you need to know about how they work. 

Key takeaways

• A jumbo loan is a type of mortgage that exceeds Federal Housing Finance Agency (FHFA) conforming loan limits (CLLs).
• CLLs vary by location and will typically be higher in areas with high median home costs and lower in areas with low median home costs. 
• Jumbo loans aren’t backed by GSEs like Fannie Mae or Freddie Mac and may come with higher costs as a result.
• Jumbo loans typically have stricter requirements than conforming loans.

Jumbo loans are a type of mortgage used to finance high-cost home purchases. Places with high costs of living, like New York City and San Francisco, tend to have a higher concentration of jumbo loans.

Every year, the FHFA sets limits on how large mortgage loans can be in a given area. Mortgages within those FHFA limits are called conforming loans. Jumbo loans are nonconforming loans, which means they exceed those FHFA limits.

Fannie Mae and Freddie Mac are the two government-sponsored enterprises (GSEs) that buy most mortgages in the U.S. And they have their own rules for conforming loans. 

GSEs also can’t buy mortgage loans above the FHFA limits, which means jumbo loans aren’t guaranteed by a GSE. Because of this, jumbo loans may carry more credit risk for lenders and be more expensive for borrowers.

A CLL is the maximum amount a conforming mortgage can be in a certain area, according to the FHFA. These vary by location, with areas with higher median home values typically having higher CLLs than areas with lower median home values. 

For 2023, the baseline CLL for most single-unit properties is $726,200. Areas with a median home value that’s greater than 115% of that baseline amount will have a higher CLL. But CLLs can’t exceed a maximum of $1,089,300 for 2023. 

Jumbo loans and conforming loans are both types of conventional mortgages. Conventional mortgages are backed by private lenders—like banks—instead of government programs like the Federal Housing Administration.

The key difference between a jumbo loan and a conforming loan is that jumbo loans exceed the CLLs set by the FHFA. 

Otherwise, the two types of mortgages work largely the same. And getting a conforming mortgage or a jumbo loan includes many of the same basic steps: 

• Checking your credit
• Determining how much house you can afford
• Applying for a mortgage
• Getting a home inspection and appraisal
• Making the down payment
• Closing on the home
• Making monthly payments on the mortgage

Of course, the home-buying process can be complex. And these are just a few fundamental things to know about. Plus, jumbo loans may have stricter requirements than conforming loans, which could add extra steps. 

Jumbo loan interest rates have historically been higher than conforming loan interest rates. This is largely because jumbo loans aren’t backed by GSEs. And they typically carry more risk for lenders. 

In recent years, jumbo loan interest rates have actually been comparable to or even lower than conforming loan interest rates. 

But as with any loan, the interest rate a homebuyer is offered ultimately depends on many factors, including market conditions, the federal funds rate and an applicant’s creditworthiness. 

One major benefit of a jumbo loan is the ability to finance a home purchase that exceeds the area’s CLL. 

But jumbo loans may have stricter requirements than conforming loans. And the process of getting a jumbo loan might take longer than the process of getting a conforming loan. That’s partly because applying for a jumbo loan may include additional steps, like getting more than one home appraisal.

When it comes to taking out any kind of loan, it’s important to consider all the potential pros and cons. If you need help thinking everything through, consider talking to a qualified financial planner. 

Jumbo loans often have stricter requirements than conforming loans. Here are a few criteria applicants may need to meet: 

• Debt-to-income (DTI) ratio: You may need to have a lower DTI ratio to qualify for a jumbo loan compared to a conforming loan. 
• Credit score: You may need a high credit score—potentially 700 or above—to get a jumbo loan. But credit score requirements vary by lender. 
• Income and cash reserves: Jumbo loan lenders may need proof that your income and cash reserves are high enough to secure the loan.
• Down payment: Some jumbo loans require larger down payments than conforming loans. In the past, some jumbo loans have required down payments of 30% or more. Recently, many jumbo loan down payment requirements are generally in the range of about 10% to 20%. But requirements vary by lender and applicant. And keep in mind that a smaller down payment may require private mortgage insurance, affect the loan’s interest rate and result in higher monthly payments. 

Generally, jumbo loans are geared toward people with high credit scores, low DTI ratios, high incomes and significant cash reserves. 

You can use the FHFA’s conforming loan limit values map to look up limits in your area. And it may be a good idea to meet with a qualified financial advisor who can help you figure out if a jumbo loan is right for you.

A jumbo loan is a mortgage that exceeds the FHFA’s conforming loan limit for that location. Jumbo loans can’t be backed by GSEs. And they may have stricter requirements and higher costs than conforming loans. 

If you’re just starting your home search, it may help to know what to look for when buying a house and research some important questions to ask when shopping for a house.