What Is a Jumbo Mortgage? Unpacking Bigger Home Loans for Buyers

Few things feel more serious than taking out a loan, especially when that loan is a mortgage to buy a house. You’re signing on to care for and maintain real estate property, while also agreeing to pay back your loan in accordance with the contract you signed in order to receive the funds. So when a term like “jumbo mortgage” comes up, it may sound like some kind of joke or exaggeration, or — if you’ll excuse the pun — mumbo jumbo. But in fact, it’s a very real thing!

To clear up any confusion, we’re digging into exactly what a jumbo mortgage is, how it works, and who it’s for. For expert, first-hand insight, we’ve brought in top Washington, D.C.-area real estate agent Jason Cheperdak, who also holds a jumbo mortgage himself.

First things first: What is a jumbo mortgage?

Jumbo mortgages are home loans for an amount that surpasses the conforming loan limits set by the Federal Housing Finance Agency (FHFA).

In this case, “conforming” means that a loan meets the requirements for purchase by a government-sponsored enterprise (GSE) — think Fannie Mae and Freddie Mac. When a loan doesn’t meet these requirements, it’s considered non-conforming, and this includes jumbo loans.

Though jumbo loans can have favorably low-interest rates (more on that later), they are a higher risk for the lender, and thus carry more stringent requirements for borrowers.

So, what is the conforming loan limit?

This amount is subject to change each year, and its specifics are location-based.

For 2021, the conforming loan baseline limit is $548,250 for a single-family home. (For the sake of comparison, the baseline in 2020 was $510,400).

In some areas where the cost of living is higher than the national average, this limit may be adjusted to accommodate higher housing prices — for 2021, that translates to $822,375, or 150% of the baseline. Metro areas in California, New York, and Washington, D.C., are typical recipients of this higher limit, as are Hawaii and Alaska.

Who determines these limits, and how are they set?

The Federal Housing Finance Agency (FHFA) sets these baseline limits. Each year, the conforming loan limit is determined by a formula set forth by the Housing and Economic Recovery Act (HERA) of 2008.

Put simply, the FHFA evaluates the average home value in the United States through their House Price Index, and the conforming loan limit is set based upon this average figure. As the average home value rises each year, the FHFA increases the conforming loan limit. New loan limits are typically announced at the end of the year — the numbers for 2021 were announced in mid-November of 2020, for example.

As mentioned above, because some areas of the country have consistently higher home prices and overall costs of living, the conforming loan limits for those regions are also adjusted accordingly on an annual basis.

(Note that while there are countless charts on conforming loan limits available online, the best way to ensure that you’re receiving the most accurate, up-to-date information on jumbo loans and limits in your state and county is always to speak directly with a lender or refer to the FHFA website.)

How does someone qualify for a jumbo mortgage? What are the interest rates?

Because jumbo loans are for a (subjectively) large amount of money, your credit score and credit history will need to be in great shape.

Expect lenders to look for a credit score above 700 — perhaps even above 720 — and a low debt-to-income (DTI) ratio, which refers to the amount of debt you are repaying monthly (including your mortgage payment) in relation to your income. A DTI of 36% is preferred, though there may be wiggle room up to 45%, depending on your assets and the lender.

Speaking of which, if you’re pursuing a jumbo loan, you’ll need to be prepared to put down some cash.

“I think the first thing people need to know is that you’ll [usually] need to put down 20% or more,” notes Cheperdak.

While this isn’t strictly true with every lender in every market, a 20% down payment is a pretty common request among jumbo loan providers. An exception to this is if you’re qualified to pursue a Veterans Affairs (VA) loan — the only type of government-backed jumbo loan available — in which case the 0% down benefits could extend to jumbo loans.

“This is a game-changer,” says Cheperdak. “In my opinion, this gives our veteran community some of the most flexibility and the most buying power in today’s market.”

As for jumbo mortgage interest rates, while you might expect a higher-than-normal rate given the higher-than-normal dollar amounts involved, you may be surprised. As of this writing, the current national average interest rate on a 30-year fixed-rate jumbo mortgage is 3.110%. Meanwhile, the average interest rate on a standard 30-year fixed mortgage is 3.21%.

Though interest rates are subject to change regularly, according to Chase, “jumbo mortgage rates are often competitive and may be lower than conforming mortgage rates.”

Bottom line? It all depends on market conditions and the lender. That’s why, as we’re about to discuss, it’s worth consulting experts and rate-shopping your jumbo loan.

How can a homebuyer find a jumbo mortgage?

While your real estate agent can help refer you to a suitable mortgage lender — or you can start the conversation with your preferred bank or credit union — you’ll want to be ultra-mindful of your sources.

Cheperdak notes that while there are lots of lenders who may offer jumbo loan products, this is a situation where you’ll probably want to work with one who specializes in this type of loan. It’s particularly helpful if you have an experienced real estate agent by your side — and in this case, “experience” should mean that the agent is used to working with high-dollar homes.

Though your agent isn’t necessarily meant to serve double-duty as your financial advisor, many agents who work in jumbo loan markets do have the expertise and connections to help you navigate your options.

Cheperdak’s team regularly partners with the financial advisors of their clients to create a financial plan specifically for real estate assets. Because jumbo loan rates can be quite low — Cheperdak discloses that the interest rate on his own jumbo loan is 2.625% — homebuyers typically leverage their loans to enable investments elsewhere.

He definitely encourages shopping around for the best interest rates and loan terms. After all, you’re taking out a loan so big it’s described as jumbo — now isn’t the time to feel obligated to work with the first mortgage lender you’ve said hello to!

So feel free to run a Google search for phrases such as, “jumbo mortgage [city, state]” and “jumbo mortgage providers.” Do some reading, make some calls, schedule some appointments, and be sure to fully explore your options, both locally and online.

Can jumbo loan mortgage interest payments be claimed on taxes?

Good news for jumbo mortgage holders: The mortgage interest deduction indeed still applies.

The only caveat here is that you’ll only be able to deduct mortgage interest on the first $750,000 of the loan — that is, if you’re married and filing jointly. If you’re single or married and filing separately, it’s more like $375,000.

And we’d be remiss if we didn’t suggest that you speak with a tax professional to clear up any questions when it comes to available tax credits and deductions involving your home. If you don’t already have a tax expert at hand, your real estate agent or jumbo loan lender can likely offer a referral or two.

What else should buyers know about jumbo mortgages?

“They’re not scary; they’re normal!” Cheperdak enthuses, aware that many people are skeptical of jumbo loans due to the name.

Remember that in actuality, jumbo loans differ very little from conforming loans; you’re just dealing with more money. And when more money is involved, it’s worth evaluating how to best allocate your funds and manage your assets.

So, together with an experienced agent, a knowledgeable lender, and a financial advisor, you should feel well-equipped to pursue a jumbo mortgage on the home of your dreams.

Header Image Source: (William Potter / ShutterStock)