What is a jumbo mortgage?

In the world of mortgage jargon, it’s refreshing to see a term that tells it like it is. A jumbo mortgage is, quite simply, a very large mortgage. And if the home you’re buying is expensive or in a high-cost area, you’ll likely need one, so let’s look at how they differ from standard mortgages.

Jumbo loans are also called non-conforming loans because they don’t conform to Fannie Mae and Freddie Mac’s limits for purchasing mortgages. In most of the U.S., the 2018 threshold for conforming loan amounts is $453,100. But in high-cost housing markets — largely in the Northeast, along the West Coast, and in Hawaii — the limit before hitting jumbo territory rises to $679,650, or even higher.

If you’ll need a jumbo mortgage, a few extra things might be required of you beyond qualifying for a conforming loan. For one, you may need a slightly higher credit score, as many jumbo lenders require scores of at least 700.

Your down payment requirement may also increase. Though some conventional mortgages allow down payments as low as 3 percent, a jumbo mortgage will likely require at least 10 percent, and maybe as much as 15 or 20 percent.

Jumbo lenders will generally also require that you show more cash in reserve than a conforming mortgage would require. Needing to demonstrate reserves of 12 months’ mortgage payments is not uncommon for jumbo loans.

As for costs, jumbo mortgages used to charge higher rates than conforming loans. But today, they may be more, less or about the same. They may, however, cost more for processing given their increased paperwork. And some lenders will require a second appraisal be conducted.

Though you won’t have a choice if the house you’re buying requires a jumbo mortgage, you’re wise to know the differences going in.