If you want to buy a high-priced home and need to borrow a lot for the purchase, you’ll need a jumbo loan.

What are jumbo loans?

Jumbo loans earn their title because they exceed the conforming loan limit, which is the maximum loan amount subject to guarantee by Fannie Mae and Freddie Mac. These limits differ depending on where the property is located.

Jumbo loan limits by state

Jumbo loan limits don’t always vary by state; they vary by the counties within those states. To determine whether you need a jumbo loan, start by looking at the state where you want to buy. Keep in mind that what qualifies as a jumbo loan might look very different in a county just a few miles away, with the exception of Hawaii and Alaska, where the jumbo loan limit is the same no matter where you go.

What are typical jumbo loan requirements?

When comparing jumbo loans versus conventional loans, know that qualifying for the bigger-sized borrowing package tends to be more difficult. You’re borrowing more money, so a lender needs to feel even more confident you’ll pay it back. While every lender is different, here’s a look at some fairly standard jumbo loan requirements:

• Credit score – The minimum credit score required for a jumbo loan depends on the mortgage lender, but is usually at least 700. Conforming loan credit score minimums are typically 620 or 640.
• Debt-to-income (DTI) ratio – When it comes to DTI ratio, the lower the better, especially for a jumbo loan. Many lenders look for no higher than 43 percent.
• Down payment – The minimum down payment on a jumbo loan varies by lender. While lenders often approve down payments as low as 3 percent for conventional loans, jumbo loans typically have much larger minimums: 10 percent or greater. Often, you’ll need at least 25 percent down to get the lowest advertised interest rate.
• Cash reserves – Some lenders might want to see a sizable cushion of cash in your accounts, too. Be prepared to show that you have enough money remaining to cover between six months’ and 12 months’ of mortgage payments.

Why are jumbo loan limits necessary?

Conforming loan limits are set by the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that buy a large portion of mortgages made in the U.S. from lenders and resell them on the secondary market to investors. These limits help lenders make more loans available to borrowers, since the lender can now sell them to the GSEs, mitigating risk if the borrower can’t repay. Loans outside of the conforming loan limits, including jumbo loans, are riskier for lenders.

What are jumbo loan rates?

For some time now, jumbo loan rates have been lower than the rates you’ll find on conforming loans. That wasn’t always the case.

Rates on jumbo loans are also tied to the credit profile of the borrower, just like any other type of mortgage.

“Credit scores are a critical input in the lending decision,” says Greg McBride, chief financial analyst for Bankrate. “Lenders may use compensating factors such as higher income or significant assets to offset a deficiency in the credit score, and this tends to be more common in jumbo loans than the smaller conforming and government-backed loans.”

How to shop for a jumbo loan

While they’re easy to find, jumbo loans aren’t all the same. Some lenders might cap the size of the loan at $2 million, $3 million or $4 million, while others might be willing to let you borrow significantly more, such as $5 million or $10 million.

Just as it pays to compare multiple lenders with conventional mortgages, you’ll want to consider a few different options for jumbo loans, too. You might also want to talk with a mortgage broker who can help you find options based on your specific needs.

Keep in mind, too, that interest rates have been rising across the entire home lending landscape. Be sure to use Bankrate’s mortgage calculator to estimate how much interest you’ll be paying. If you see a rate that looks especially attractive and you’re ready to buy, it’s wise to consider locking it in before they jump higher and that jumbo loan has an even bigger price tag.