A jumbo loan is a type of financing that exceeds the limits set by the Federal Housing Finance Agency (FHFA) for conforming loans. Conforming loans meet the requirements to be purchased by Fannie Mae and Freddie Mac, but non-conforming loans, such as jumbo loans, do not. Jumbo loans are typically used to finance properties that are too expensive for a conventional conforming loan. The maximum amount for a conforming loan in 2023 is $726,200 in most counties, as determined by the FHFA. Jumbo loans can be used for primary homes, investment properties, and vacation homes.

Jumbo loans have stricter underwriting guidelines, such as higher credit score, income/assets, and down payment requirements. Homeowners must undergo more rigorous credit requirements than those applying for a conventional loan, and approval requires a stellar credit score and a very low debt-to-income (DTI) ratio. Because jumbo loans carry more credit risk for the lender since there is no guarantee by Fannie Mae or Freddie Mac, they are considered riskier for lenders. The interest rate charged on jumbo mortgage loans is generally higher than a loan that is conforming, due to the higher risk to the lender.

Jumbo loans help you finance a large home purchase, however, you’ll pay more in interest over time than with a conforming loan. It can be more expensive to refinance a jumbo loan due to the closing costs. When you’re shopping for a jumbo loan, it’s smart to make sure your financials are in as good a shape as possible. This means bolstering your savings and pulling your credit reports from the three main credit reporting agencies, then addressing any errors you find.