3 Things to Know About Jumbo Loans

A jumbo loan is a whole different ball game than a conventional loan.

When you buy a home, you will likely need a mortgage. Since this is a large debt, it's important to understand how these home loans work.

One of the first things to know is that mortgage loans can be broadly divided into two categories: conforming loans and jumbo loans. Conforming loans meet requirements to be purchased on the secondary mortgage market by two government-sponsored entities -- Fannie Mae and Freddie Mac. There are many requirements, but the value of the loan is one of the most important.

If a loan exceeds the conforming loan limit, it's classified as a "jumbo loan." The specific definition of that changes from year to year. But, as of 2021, loans above $548,250 are considered jumbo loans in most parts of the country.

If you are buying an expensive home and have to get a jumbo mortgage, there are three things to know before you start shopping for your mortgage.

1. Your interest rate will probably be higher

Historically, the rates on jumbo loans have been higher than the rates on conventional mortgages.

That wasn't the case recently, though. For years, jumbo loans were considered by investors to be less risky because they had stricter requirements, and borrowers tended to be better qualified. As a result, jumbo loan rates were cheaper than conventional loan rates for much of the 2010s.

The pandemic changed the mortgage market, though, sending the rates on conforming loans plummeting. Now, if you are borrowing a larger amount and have to take out a jumbo loan, you can expect to pay a slightly higher interest rate than a well-qualified borrower would pay for a conforming loan.

2. You may need a larger down payment

Since lenders are providing larger loans, and since more expensive homes can take longer to sell for market value if foreclosed on, lenders take on a bigger risk with jumbo mortgages. That's especially true since jumbo loans also can't be resold to Fannie Mae and Freddie Mac. Lenders might have to keep them on their books or try to package them for sale to other investors.

As a result, many mortgage lenders require a larger down payment for jumbo loans to make sure borrowers have more money on the line and that homes have more equity in case of foreclosure. While you might find some lenders that allow a 10% down payment, it's more likely you'll need to put down at least 20% and potentially even as much as 30% if you take out a jumbo loan.

By contrast, it's relatively easy to find lenders who are willing to make conforming loans with down payments of 3% (and lower) if you're a well-qualified borrower. Check out the following guides for more information:

• How to pay for a house with zero down payment
• FHA loans
• USDA loans
• VA mortgage loans

3. Jumbo loans can be more difficult to qualify for

Because of the added risk jumbo loans present, mortgage lenders also want borrowers to have their personal finances in order and be very well qualified.

This means they will be more strict in requiring proof of:

• A sufficient, stable income
• A good or excellent credit score
• A reasonable debt-to-income ratio

If you can meet these qualifying requirements and have a larger down payment to make, you should have no trouble finding a lender offering an affordable jumbo loan. Just keep in mind it will probably come with a slightly higher rate than a conforming loan. And it may be a little harder finding the perfect lender, especially if you're borrowing to buy a more expensive home.