What's A Jumbo Mortgage Loan?

A jumbo mortgage loan is simply a mortgage that exceeds the traditional loan limit. Jumbo loans are structured in much the same way as those that remain under the conforming loan limits, but they are treated differently on the back end of the lending process, Rocket Mortgage notes.

The typical loan is written and funded by a bank or another financial institution that works with borrowers. According to the Federal Housing Finance Agency, once a loan has been funded, it is typically sold to government-sponsored enterprises (Fannie Mae and Freddie Mac). These organizations bundle similar loans together as an investment product or maintain them in a secure portfolio within the purview of government maintenance. While this may seem reminiscent of the practices employed before the 2008 housing market crash, new guardrails are in place to prevent overextension in the market. Likewise, lending is done on a more stringent basis these days, and subprime mortgages are largely a thing of the past.

On the other hand, jumbo mortgage loans are an interesting lending product that is treated as a class of its own. For example, Rocket Mortgage notes that the typical cap in much of the country is $647,200, with exceptions being made for uniquely expensive local markets like those of Alaska and Hawaii and within particular counties across other state territories. Succinctly, a jumbo loan exceeds this cap on conforming loan values. However, there is more to a jumbo loan than simply the dollar figure.

The housing market is becoming far more competitive among interested buyers. As a result, the modern marketplace — across nearly all local market segments — is enjoying a surge in home valuation. CNBC reports that in March 2022, housing prices were more than 20% higher than just a year prior. This means that more buyers who would have remained under the cap are now having to borrow more to purchase the homes they're interested in.

The result is a lending market that's far more amenable to these types of specialized loans. In previous years, it may have been uncommon to secure a jumbo loan from the typical local financial institution without jumping through additional hoops or showcasing special financial eligibility.

Rocket Mortgage reports that jumbo mortgage loans have become a mainstay in the conversation between borrowers and lenders, making financing for more expensive properties equally accessible for all types of homebuyers. Eligibility criteria are similar to those of smaller loan amounts, with minor variations to the terms to be expected. The bottom line is that buyers who are qualified borrowers can confidently approach lenders for the expansive cash requirements necessary for a more expensive property in more accessible ways than perhaps ever before.

Loan terms for those designated as jumbo loans often mirror conventional borrowing options, Rocket Mortgage explains. A jumbo loan is often taken out as a fixed-rate, 30-year mortgage — identical to the most common traditional loan arrangement taken out by borrowers, as per Investopedia.

The only detail that truly sets a jumbo loan apart from more traditional mortgage products is the inflated principal balance borrowed to facilitate the purchase. Jumbo loans can be crafted as an Adjustable Rate Mortgage (ARM) that begins as a seven-year fixed rate and then take on a variable quality, just like other mortgages that aren't carrying the same overall balance.

They can also be structured as simple, fixed-rate loans that make use of the same years-long structure of 15, 20, or 30-year terms. Jumbo loans are highly accessible and don't have to feel like a foreign realm for homebuyers looking to make a more substantial investment in their living space.

It's important to note that jumbo loans may have a somewhat higher interest rate. As with any loan calculation, your lender will consider all the factors of risk that they can. The increased principal balance of the loan certainly looms large in this equation. A jumbo loan is naturally higher in debt creation than other smaller loans, so they come with a higher monthly repayment obligation and an increase in the raw dollar amount that's added to the balance in the form of interest addition.

All this leads to a larger risk for the lender, making for a potentially higher interest rate on the funding. Rocket Mortgage notes, however, that a typical discrepancy of less than 1% between conforming mortgage loans and nonconforming, jumbo loans is to be expected, and many highly qualified borrowers may even find a rate reduction over the going rate from some mortgage lenders in their local marketplace.

As with any borrowing opportunity, a calculation of risk and reward is necessary; any borrower in the market for a new home will need to spend time polishing their credit resume — so to speak. Well-groomed credit history and lending track record can help you make the most of your next home purchase, whether it falls into the traditional, conforming loan term or extends beyond it, requiring a jumbo loan to complete the transaction.

The average jumbo loan will require some additional considerations on top of the typical application process. For one thing, while the average down payment in the current market is about 6% (via American Family Insurance), Rocket Mortgage notes that jumbo loans often require a larger contribution to find final approval. Many jumbo loan borrowers must make a more traditional 20% down payment, while Rocket Mortgage explains that their jumbo loan rate is around 10% — only slightly higher in percentage than the typical down payment.

A larger purchase price means a higher dollar figure, though, so the difference in a few points on the down payment can mean thousands of dollars that must be accounted for in your savings leading up to the new investment opportunity.

Lenders may also require a higher credit score to be considered for a loan classified as a jumbo mortgage. While a credit score of around 620 can qualify you for a traditional mortgage (via US Bank), the best rates in this class are reserved for those with scores in the 700s and above. Conversely, you'll want to ensure that your score is above 700 before applying for funding in this higher monetary classification, with an excellent credit score (above 800, according to Equifax) gaining the best terms for borrowers.