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A jumbo mortgage is a home loan that exceeds the borrowing limits allowed on conventional home loans. Borrowers must get a jumbo loan or other alternative financing when a home is priced higher than limits backed by Fannie Mae or Freddie Mac.
Jumbo loan limits are impacted by where a property is located, and dollar limits often change from year to year. In some places with exceptionally high housing costs, Fannie Mae or Freddie Mac will approve loans at higher limits to better reflect local market conditions.
How Jumbo Mortgage Rates Compare to Conventional Loans
Most of the time, jumbo loan rates run somewhat higher than rates on comparable conventional loans. That’s because Fannie Mae and Freddie Mac guarantee their loans for investors, but jumbo loans don’t have that backing, so lenders assume all the risk themselves.
If you’re actively shopping for a jumbo loan, you can compare rates and shop for lenders using our calculator.
Qualifying for a Jumbo Mortgage
Requirements are generally more stringent for jumbo loans than for conventional loans. That’s because the loan amount is larger, and a government agency does not insure the loan.
Borrowers want higher credit scores, ample cash reserves, and a larger down payment to ease their concerns that a borrower will fall behind on payments or seek foreclosure.
Many lenders approve borrowers for jumbo loans with FICO credit scores as low as 680, compared to 720-740 a few years ago. Many are also accepting down payments of as little as 10-15%, though anything under 20% will require that you purchase private mortgage insurance at an added expense.
Those borrowers with high credit scores who can make down payments of 30% or more will get the best possible rates because they demonstrate less risk to the lender.
Borrowers will also examine your debt-to-income ratio (DTI), which should be at most 43% of your gross monthly income. DTI compares your overall gross monthly income to your recurring debt obligations, including your mortgage, credit card, bank, and personal loans.
Depending on the lender and the terms you’re seeking, you should also expect to have 6-12 months of reserves on hand to demonstrate added liquidity and security.
An Adjustable Rate Loan May Be a Better Option
Borrowers who want to avoid higher monthly payments may wish to pursue an adjustable-rate jumbo loan (ARM). The initial rate for an ARM is often lower than a standard jumbo loan with fixed terms, lowering payments through an initial period that may run 5-10 years.
After that, the rate will adjust based on market conditions, and your jumbo loan payment will likely increase.
ARMs also work well for borrowers who expect to move every few years, as is often the case with executives building their careers and climbing the corporate ladder. You can avoid a higher fixed-rate loan if you intend to move in five years or less.
The other option is to refinance your ARM at the end of the lower rate period if your situation permits.
A Piggyback Loan is a Viable Alternative
One way to minimize the cost of a jumbo mortgage is through a piggyback loan. This second mortgage covers the difference between the local conforming loan limit and the price of the home.
For example, suppose you’re looking to borrow $950,000 to buy a home, and the local loan limit is $766,550. You might obtain a conventional Fannie/Freddie mortgage for that amount and cover the rest with a piggyback loan for the balance.
The piggyback loan is a second mortgage or second lien, similar to a home equity loan. If you default on your loans, it doesn’t get paid until after the first lien (the conventional loan) is paid.
For that reason, mortgage rates are higher on a piggyback loan or other second lien than on a primary mortgage.
This strategy only works if the combined rates on the primary and piggyback loans are cheaper than jumbo mortgage rates.
» MORE: See today’s refinance rates
Fannie Mae and Freddie Mac Limits for 2024
These are the limits for Fannie Mae and Freddie Mac loans in 2024.
Source: Fannie Mae