Jumbo Loans: A Common Type of Non-Conforming Mortgage

When you start shopping for a home loan, you will hear terms like “conforming” and “non-conforming.“ These words describe whether a mortgage meets the rules set by two government-sponsored companies, Fannie Mae and Freddie Mac. Most loans that do follow those rules are called conforming loans. They are easier to get, usually have lower interest rates, and require less money down. But what happens when you need to borrow more money than the conforming limit allows? That is where a jumbo loan comes in. Jumbo loans are the most common type of non-conforming mortgage. Understanding how they work can help you decide if they are right for you.

First, let’s look at why a loan might be non-conforming. The main reason is the loan amount. Every year, Fannie Mae and Freddie Mac set a maximum loan size they will buy from lenders. In most parts of the country, that limit for a single-family home is around $766,000 in 2024. Some high-cost areas, like parts of California or New York, have higher limits, sometimes over $1.1 million. Any loan that is larger than the limit in your area cannot be sold to Fannie Mae or Freddie Mac. That makes it non-conforming. Lenders must keep these loans on their own books or sell them to investors who have different rules. Because these loans are bigger and riskier, lenders set stricter requirements.

A jumbo loan is simply a mortgage that is larger than the conforming limit. If you are buying a home that costs $900,000 and you want to put 20% down, your loan amount would be $720,000. That is below the current limit for most areas, so it would still be conforming. But if the home costs $1.2 million and you put 10% down, your loan would be $1.08 million. That is above the limit, so it becomes a jumbo loan. The main difference is that jumbo loans are not backed by Fannie Mae or Freddie Mac. That means lenders take on more risk. To protect themselves, they ask for a bigger down payment, a higher credit score, and lower debt-to-income ratio.

What does that mean for you as a home buyer? First, you will likely need a down payment of at least 10% to 20% for a jumbo loan. Some lenders require 20% or even 30% if your credit is not excellent. Your credit score should be high, usually 700 or above, and often 740 or better to get the best rates. You will also need to show that you have plenty of cash reserves, usually enough to cover several months of mortgage payments. Lenders want to know you can handle the big payments even if you lose your job for a while.

Interest rates on jumbo loans used to be higher than conforming loan rates. But in recent years, jumbo rates have become very competitive. Sometimes they are actually lower than conforming rates. That happens because jumbo loans are often made to wealthier borrowers who are less likely to default. Lenders compete for these customers. Still, you need to compare offers carefully. The terms can vary a lot from one lender to another.

One important thing to know: jumbo loans are still conventional loans. They are not backed by the government, unlike FHA or VA loans. They are also not subject to the same consumer protection rules that apply to conforming loans. For example, some jumbo loans have adjustable rates that can change a lot over time. Fixed-rate jumbo loans are common, but you should ask about the specific terms.

If you cannot afford a 20% down payment on a jumbo loan, you have other options. Some lenders offer piggyback loans. That is where you take out a first mortgage for part of the purchase and a second mortgage for the rest. This lets you avoid private mortgage insurance and may help you stay under the conforming limit. For example, you put 10% down, take a first mortgage at 80% of the home price, and a second mortgage at 10%. The first mortgage would be conforming if it is under the limit. But this strategy can get complicated, and the second mortgage often has a higher rate.

Another alternative is to look for a conforming loan in a different price range. If you really want a home that costs just above the conforming limit, you might ask the seller to lower the price a bit. Or you could put more money down to reduce the loan amount. Every dollar you put down above 20% helps bring the loan closer to conforming size.

In short, jumbo loans are a practical way to buy an expensive home when you cannot stay within the conforming loan limits. They require a stronger financial profile, but they give you access to higher borrowing amounts. As you compare mortgages, pay attention to whether your loan will be conforming or non-conforming. That simple label affects your down payment, your interest rate, and your monthly payment. Knowing the difference helps you choose the right loan for your situation.