What is a jumbo loan and when do you need one?

When analyzing your options for buying a home, you’ve likely heard of a jumbo loan or a jumbo mortgage. But how do you know if a jumbo loan is right for you?

We’ll explain what a jumbo loan is, how one is used, and what conditions are in place for these loans. Once we answer these questions, you can determine if a jumbo loan is right for you.

Jumbo mortgages are non-conforming loans that do not meet standard mortgage guidelines. It’s helpful to know what conforming loans and non-conforming loans are and how they are different.

• Conforming loans meet mortgage guidelines and do not exceed specific loan amounts, called conforming loan limits, set by the Federal Housing Finance Agency. These loan limits are observed by federal mortgage investors like Fannie Mae and Freddie Mac.
• Jumbo loans are non-conforming loans and have higher maximum loan amounts than conforming loans. They cannot be sold to Fannie Mae and Freddie Mac.
• Because jumbo mortgages go above these limits, they create higher risk for lenders. That means lenders may scrutinize potential borrowers more closely when they apply for jumbo mortgages.

Jumbo loans may be beneficial in certain situations:

• Having a larger loan amount may give you more financial leverage if you’re buying a home in a high-cost area.
• Jumbo mortgages can come with a fixed-rate or adjustable-rate loan option, which can provide borrowers with more flexibility.

Jumbo loans tend to have different requirements than conforming loans since they create a higher risk for lenders. Borrowers may need to meet higher standards to be approved for a jumbo loan.

• Higher down payment – Jumbo mortgages may require borrowers to pay at least a 20% down payment at closing to mitigate risk. Wells Fargo requires as little as 10.01% down.
• Credit and debt-to-income ratio (DTI) – Since jumbo loans carry more risk for lenders, they may look for borrowers with good-standing credit scores and with low DTI. Lenders may have different thresholds for these requirements, so be aware of your credit profile and what your lender’s requirements may be.
• Cash reserves – To show lenders you can make consistent monthly payments on a jumbo loan, they may ask for detailed bank or tax statements for proof of income and/or cash reserves in your accounts. Borrowers may also qualify with retirement account assets or gift funds, depending on your lender’s conditions.

VA loans may be an option for qualifying service members. Learn more about VA loans for more information.

In general, jumbo loans may make sense for your situation if:

• You’re buying a home in a high-cost area.
• Your down payment meets the lender’s requirements for a jumbo loan.
• You are in good credit standing.

Wells Fargo customers can access jumbo mortgages with as little as 10.01% down — and no mortgage insurance is required. Learn more about our jumbo loan options and talk with a home mortgage consultant for details.

Wells Fargo customers may qualify for a closing cost credit or interest rate discount based on eligible assets. Learn more about our relationship benefits.