Fannie Mae and Freddie Mac are government-affiliated agencies that market mortgages in the United States. They have preset limits on what loans they will fund, but these amounts are not uniform. Some areas where housing costs more have higher limits to account for regional differences.
Few could argue that it’s more expensive to buy a home in Hawaii than in the rural areas of Kansas or Iowa, for example.
While “jumbo” may conjure images of super-sized country estates and oversized Hollywood mansions, even an unassuming house in the suburbs can require a jumbo mortgage if you’re purchasing in a high-priced neighborhood.
If you’re home shopping and the loan you want to qualify for exceeds conventional loan limits set by these agencies, you’ll need to consider a jumbo mortgage to fund your purchase. You can also use a few other strategies to finance your purchase, but jumbo loans are one of the most common high-end loan products buyers use.
Each year, the Federal Housing Finance Agency (FHFA) publishes conforming loan limit values that apply to all conventional loans delivered to Fannie Mae. These include baseline and high-cost area loan limits that vary by location.
High-cost areas include many of the nation’s major metropolitan areas, including New York City, Los Angeles, San Francisco, and Washington, D.C., among others. In 2024, those amounts are as follows.
Source: Fannie Mae
Any loans above these amounts will require a jumbo loan or other alternative financing, such as a high-balance loan, which may be available if the home is in a federally designated high-priced market.
What You’ll Need to Qualify
Banks and other lenders like doing jumbo loan business because those seeking these loans are wealthier than average consumers. They may offer attractive terms to high-income borrowers to build a relationship that can lead to selling them business banking accounts, checking accounts, savings accounts, life insurance, and other services.
Jumbo loans also don’t require banks to follow Fannie Mae’s guidelines on a loan that can never be sold. A jumbo loan allows a bank to lock up a high-dollar loan at an attractive interest rate for as long as 30 years.
In a nutshell, you’ll need more money, lower debt, and better credit scores to qualify for a jumbo loan.
Specifics vary by lender, but a jumbo mortgage applicant typically needs at least a 700 credit score. Most jumbo borrowers have credit scores in the 800 range.
Loan terms can vary widely based on their credit score, which correlates to banks’ assessment of lending risks. For example, with a lower score, you need more reserves, including 9-12 months of funds, to cover the home’s principal, interest, taxes, and insurance.
In addition to reserves, you must pay your down payment and closing costs if your loan is approved.
The higher the amount you seek, the more you’ll be required to invest in a downpayment. For example, on the low end, you may be required to put 20% down, but if you want a mortgage of at least $2 million, you may need to put at least 30% down and comply with other cash reserve requirements.
In an age of hypercompetitiveness among lenders, a few may accept a downpayment of as little as 5% if you are considered a reasonable risk based on other factors. It all depends on who you work with and what they want to see from you.
Jumbo loans also require lower debt-to-income ratios (DTI) of 40%, compared to 45-50% for conventional loans. Your DTI compares your gross monthly income to your outstanding debts.
Part of the reason for these stricter requirements is that jumbo loans aren’t eligible for backing by Fannie Mae, Freddie Mac, or any other government entity. That means they aren’t guaranteed in the event of default, making them a riskier prospect than lower-cost, conforming mortgages.
That also makes it more difficult to package jumbo loans into mortgage securities for sale to investors. Lenders often sell off loans because it allows them to earn more money originating new loans instead of on interest payments, freeing fresh capital to issue more loans.
To prove your financial health, you’ll need to provide a lender with extensive documentation, usually more than for a conforming loan. This will include full tax returns, W-2s, 1099s, bank and investment account statements, and other pertinent financial information.
Depending on market conditions, many lenders offer jumbo loan rates that are competitive or slightly lower than conforming loan rates. Because jumbo loans are bigger and there are extra qualifying steps, expect higher costs when you close.
Other Loan Options
You may have other options you can tap into instead of a 30-year fixed-rate jumbo loan.
While people are often wary of an adjustable rate loan (ARM), this type of loan may be ideal for some borrowers.
The initial rate on an ARM is much lower than on a comparable 30-year fixed-rate mortgage. A wealthy borrower who intends to pay off their mortgage quickly can pay more toward principal and less interest before the rate resets after the end of the initial period.
Borrowers who want to avoid spending a lot of money on an expensive home often use ARMs to minimize their monthly payments. If the rate does reset higher in 5-10 years, they can afford the higher payments if needed or possibly refinance into a new ARM at a better rate.
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-rate loan for 30 years if you intend to move in five years or less.
Another possible strategy is to consider a combination loan. In this case, a borrower can take out a second, smaller mortgage simultaneously with the first mortgage.
The first, larger mortgage conforms to the loan limit, avoiding some of the increased requirements and potentially higher rates on a jumbo. The downside is that the interest rate on the second mortgage is typically higher, and you’ll have two mortgage payments due each month.
You can also split the mortgage into two separate loans with a piggyback loan. The first loan conforms to Fannie Mae and Freddie Mac requirements, but the second mortgage can be a home equity line of credit (HELOC) to make up the difference.