McDonald’s might have taken away its supersized meals, but mortgage lenders still have supersized mortgages—called jumbo mortgages—on offer.

In today’s red-hot real estate market, as prices continue to climb, you may find yourself needing to borrow a large sum for your new home. If that amount is $650,000 or more (depending on where you’re buying a property), you’ll want a jumbo loan. To secure a loan the size of P.T. Barnum’s elephant (also named Jumbo), you’ll have to get organized, find the best lender, and brace yourself for potentially higher fees.

What is a jumbo mortgage?

Also called a nonconforming loan, jumbo loans are a mortgage that exceeds conventional conforming loan limits. Let’s translate: Every year, the Federal Housing Finance Agency (FHFA) sets limits on the size of loans that can be purchased by Fannie Mae and Freddie Mac, the government-backed home mortgage companies. Anything under that cap “conforms” and is a considered conforming loan. By law, Fannie Mae and Freddie Mac can’t secure loans that exceed the FHFA’s limits, so larger mortgages are “non-conforming” or jumbo loans.

In 2022, what qualifies as a jumbo mortgage loan for a single-family home in the contiguous 48 states, Washington D.C., and Puerto Rico is a loan that exceeds $647,200. If you live in a high-cost area, the jumbo mortgage limit is adjusted for local market conditions. The jumbo loan limit 2022 for high-cost areas is $970,800 (woof). You can check the loan limits for your area on Fannie Mae’s website.

The limit isn’t static; The jumbo mortgage limit is adjusted annually. Case in point: As real estate prices continue to rise, for 2022, the FHFA raised the maximum loan amount by $94,950, an 18% increase from 2021. And I oop.

Since jumbo mortgages aren’t subject to federal limits, private lenders have more discretion to approve loans. That’s good news for applicants, but here’s the downside: Since jumbo loans are considered higher risk for lenders, borrowers may face more stringent requirements and higher borrowing costs (more on that later).

How do jumbo mortgages differ from conventional mortgages?

Let’s start with what is the difference between conforming and jumbo mortgages. The single biggest distinction is the size of the loan. In most parts of the US, in 2022, conforming loans are mortgages less than $647,200.  

Maybe hit the gym a few times before you apply for your jumbo loan, because you’ll be doing some heavy lifting in that broker’s office. Since jumbo mortgages aren’t secured by Fannie Mae or Freddie Mac, the lender has no federal backstop if your finances can’t handle the weight of a gargantuan mortgage. Here are some typical considerations:

• To qualify for a jumbo loan, you may have to need a higher credit score than would be required for a conforming loan. Lenders may require a score of 700 to 720, and possibly higher.
• To demonstrate your financial health, your lender needs to get intimate with your finances by reviewing several years of bank statements, investment statements, tax returns, W2s, and 1099s. 
• You may be required to put down a higher down payment than you would for a conforming loan. That could be anywhere from 10% to 20%, depending on your lender. That’s unlike the 3.5% you can put down for an FHA loan.
• You may need not one, but two appraisals to confirm the property’s market value.
• Closing costs can be higher with jumbo loans because the application process is more involved and includes more steps (lawyers, amirite?).
• Lenders may require you have more cash on hand than is required for a conforming loan.

What influences jumbo mortgage rates?

Just because you need a jumbo loan doesn’t necessarily mean you’ll pay higher interest rates. Well qualified buyers may be able to score low jumbo mortgage rates, and even 30-year jumbo mortgage rates may be lower than you’d expect. To find the best jumbo mortgage rate, do your homework and shop around. 

Fixed- or adjustable-rate

Borrowers can often choose between a fixed-rate jumbo loan, where the interest rate is set for the life of the loan, or an adjustable-rate mortgage (ARM), which fluctuates with market conditions after a short initial fixed period. Generally, adjustable-rate mortgages, also known as variable loans, start with lower interest rates and then adjust to market rates, which are heavily influenced by the Federal Reserve and the 10-year bond yield. The rate could go down—or up. With a fixed-rate loan, the rate is locked in and never changes. Mortgage rates are historically low but are expected to rise as the Fed ratchets up rates.

Credit score 

The higher a borrower’s credit score, the more confidence a lender can have that the loan will be paid on time and in full. Banks will typically reward borrowers who have strong credit scores with the most favorable jumbo loan mortgage rates. 

Debt-to-income ratio

Debt-to-income ratio (DTI) is a measure of how much of a borrower’s gross monthly income goes to pay off debts. When borrowers have low monthly debts, it shows they’re good candidates because they have more cash on hand to service the loan. It’s the bank’s way of saying, “You’ve got to put me first.”

Purchase price

The size of the jumbo loan can influence your interest rate. The larger the loan, the more risk for the lender. As a result, they may charge higher rates for larger jumbo loan amounts.  

Down payment

When a buyer can put 20% or more down on their property purchases, lenders can often extend a lower interest rate. A larger down payment demonstrates the buyer has a significant stake in the property and makes them a more attractive customer.

Get moving on your jumbo mortgage

Jumbo loans don’t have to be scary. If you’ve finally found that perfect property, a jumbo mortgage can be the way to make your dream home a reality. It may not be your parents’ mortgage that you’ve heard about your entire life, but a jumbo mortgage can put you on the path to homeownership.