SoFi

A jumbo loan is a home mortgage loan that exceeds maximum dollar limits set by the Federal Housing Finance Agency (FHFA). Loans that fall within the limit are called conforming loans. Loans that exceed them are jumbo loans.

Jumbo mortgages may be needed by buyers in areas where housing is expensive, and they’re also popular among lovers of high-end homes, investors, and vacation home seekers.

What Is a Jumbo Loan?

To understand jumbo home loans, it first helps to understand the function of Freddie Mac and Fannie Mae. Neither government-sponsored enterprise actually creates mortgages; they purchase them from lenders and repackage them into mortgage-backed securities for investors, giving lenders needed liquidity.

Each year the FHFA sets a maximum value for loans that Freddie and Fannie will buy from lenders — the so-called conforming loans.

Jumbo Loans vs Conforming Loans

Because jumbo home loans don’t meet Freddie and Fannie’s criteria for acquisition, they are referred to as nonconforming loans. Nonconforming, or jumbo, loans usually have stricter requirements because they carry a higher risk for the lender.

Jumbo Loan Limits

So how large does a loan have to be to be considered jumbo? In most counties, the conforming loan limits for 2023 are:

•  $726,200 for a single-family home

•  $929,850 for a two-unit property

•  $1,123,900 for a three-unit property

•  $1,396,800 for a four-unit property

The limit is higher in pricey areas. For 2023, the conforming loan limits in those areas are:

•  $1,089,300 for one unit

•  $1,394,775 for two units

•  $1,685,850 for three units

•  $2,095,200 for four units

Given rising home values in many cities, a jumbo loan may be necessary to buy a home. Teton County, Wyoming, for instance, has an average home value of $1,624,087 and a conforming loan limit of $1,089,300.

Recommended: The Cost of Living By State

Qualifying for a Jumbo Loan

Approval for a jumbo mortgage loan depends on factors such as your income, debt, savings, credit history, employment status, and the property you intend to buy. The standards can be tougher for jumbo loans than conforming loans.

The lender may be underwriting the loan manually, meaning it’s likely to require much more detailed financial documentation — especially since standards grew more stringent after the 2007 housing market implosion and during the pandemic.

Lenders generally set their own terms for a jumbo mortgage, and the landscape for loan requirements is always changing, but here are a few examples of potential heightened requirements for jumbo loans.

•  Your debt-to-income (DTI) ratio. This ratio compares your total monthly debt payments and your gross monthly income. The figure helps lenders understand how much disposable income you have and whether they can feel confident you’ll be able to afford adding a new loan to the mix.

To qualify for most mortgages, you need a DTI ratio no higher than 43%. In certain loan scenarios, lenders sometimes want to see an even lower DTI ratio for a jumbo loan, or they may counter with less favorable loan terms for a higher DTI.

•  Your credit score. This number, which ranges from 300 to 850, helps lenders get a snapshot of your credit history. The score is based on your payment history, the percentage of available credit you’re using, how often you open and close accounts such as credit cards, and the average age of your accounts.

To qualify for a jumbo loan, some lenders require a minimum score of 700 to 740 for a primary home, or up to 760 for other property types. Keep in mind that a lower score doesn’t mean you won’t be able to get a jumbo loan. The decision depends on the lender and other factors, such as the loan program requirements, your debt, down payment amount, and reserves.

•  Down payment. Conforming mortgages generally require a 20% down payment if you want to avoid paying private mortgage insurance (PMI), which helps protect the lender from the risk of default.

Historically, some lenders required even higher down payments for jumbo mortgages, but that’s not necessarily the case anymore. Typically, you’ll need to put at least 20% down, although there are exceptions.

A VA loan can be used for jumbo loans. The Department of Veterans Affairs will insure the part of the loan that falls under conforming loan limits. The down payment requirement is based on the portion of the jumbo loan that’s above the conforming loan limit. The loan is available from some lenders with nothing down and no PMI. VA loans have a one-time “funding fee,” though, a percentage of the amount being borrowed.

•  Your savings. Jumbo loan programs often require mortgage reserves, housing costs borrowers can cover with their savings. The number of months of PITI house payments (principal, interest, taxes, insurance), plus any PMI or homeowner association fees, needed in reserves after loan closing depends on many factors. For a jumbo loan, some lenders may require reserves of three to 24 months of housing payments.

You don’t necessarily need to have all the money in cash. Part of mortgage reserves can take the form of a 401(k), stock portfolios, mutual funds, money market accounts, and simplified employee pension accounts.

Also, depending on the loan program, a lender may be comfortable with lower cash reserves if you have a high credit score, low DTI ratio, a high down payment, or some combination of these things.

•  Documentation. Lenders want a complete financial picture for any potential borrower, and jumbo loan seekers are no exception. Most lenders operate under the “ability to repay” rule, which means they must make a reasonable, good-faith determination of the consumer’s ability to repay the loan according to their terms. Applicants should expect lenders to vet their creditworthiness, income, and assets.

Jumbo Loan Rates

You might assume that interest rates for jumbo loans are higher than for conforming loans since the lender is putting more money on the line.

But jumbo mortgage rates fluctuate with market conditions. Jumbo mortgage rates can be similar to those of other mortgages, but sometimes they are lower.

Because the absolute dollar figure of the loan is higher than a conforming loan, it is reasonable to expect closing costs to be higher. Some closing costs are fixed, such as a loan processing fee, but others, such as title insurance, are tiered based on the purchase price or loan amount.

Pros and Cons of Jumbo Loans

Benefits

Because a jumbo loan is for an amount greater than a conforming loan, it gives you more options for ownership of homes that are otherwise cost-prohibitive. You can use a jumbo loan to purchase all kinds of residences, from your main home to a vacation getaway to an investment property.

Drawbacks

Due to their more stringent requirements, jumbo loans may be more accessible for borrowers with higher incomes, strong credit scores, modest DTI ratios, and plentiful reserves.

However, don’t assume that jumbo loans are just for the rich. Lenders offer these loans to borrowers with a wide variety of income levels and credit scores.

Lender requirements vary, so if you’re seeking a jumbo loan, you may want to shop around to see what terms and interest rates are available.

The most important factor, as with any loan, is that you are confident in your ability to make the mortgage payments in full and on time in the long term.

How to Qualify for a Jumbo Loan

To qualify for a jumbo loan, borrowers need to meet certain jumbo loan requirements. You’ll likely need to show a prospective lender two years of tax returns, pay stubs, and statements for bank and possibly investment accounts. The lender may require an appraisal of the property to ensure they are only lending what the home is worth.

Is a Jumbo Loan Right for You?

You’ll need to come up with a large down payment on a property that merits a jumbo loan, and some of your closing costs will be higher than for a conventional loan. But depending on where you wish to buy, the cost of the property, and the amount you wish to borrow, a jumbo loan may be your only choice for a home mortgage loan. It’s a particularly attractive option if you have good credit, a low DTI, and a robust savings account. And sometimes jumbo home loans actually have lower interest rates than other loans.

What About Refinancing a Jumbo Loan?

After you’ve gone through the mortgage and homebuying process, it could be helpful to have information about refinancing. Some borrowers choose to refinance in order to secure a lower interest rate or more preferable loan terms.

This could be worth considering if your personal situation or mortgage interest rates have improved.

Refinancing a jumbo mortgage to a lower rate could result in substantial savings. Since the initial sum is so large, even a change of just 1 percentage point could be impactful.

Refinancing could also result in improved loan terms. For example, if you have an adjustable-rate mortgage and worry about fluctuating rates, you could refinance the loan to a fixed-rate home loan.

Recommended: Guide to Buying, Selling, and Updating Your Home

Jumbo Loan Limits by State

The conforming loan limits set by the Federal Housing Finance Agency can vary based on the county where you are buying a home.

In most areas of the country, the conforming loan limit for a one-unit property increased to $726,200 in 2023 (the amount rises for multiunit properties). The chart below shows exceptions to the $726,200 limit by state and county.

Source: Federal Housing Finance Agency

The Takeaway

What’s the skinny on jumbo loans? They’re essential for buyers of more costly properties because they exceed government limits for conforming loans. Luxury-home buyers and house hunters in expensive counties may turn to these loans, but they’ll have to clear the higher hurdles involved.

If you’re interested in refinancing a jumbo mortgage at competitive rates, consider SoFi. You can prequalify online and put as little as 10% down.

FAQ

What are jumbo loan requirements?

Jumbo loans typically require a credit score of at least 700, a low DTI, and a down payment of at least 20%, although there are always exceptions.

What is the difference between a jumbo loan and a regular loan?

A jumbo loan is a home mortgage loan that exceeds maximum dollar limits set by the Federal Housing Finance Agency. Jumbo loans are typically used by buyers in regions with higher-priced housing but are also popular among luxury homebuyers and investors.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOHL0423002

If you’re like many people, your home is probably your biggest asset, so you might think it always makes sense to include it in your net worth. However, in some situations, this may not always be the best idea.

Here’s why: Yes, all your assets usually should be tallied as part of your net worth. But some would argue that everyone has to live somewhere, and the money you have invested in your home is basically designated for that purpose and can’t be thrown in with other assets. For instance, if most people sold their home and moved, they would typically have to put the funds from the sale toward buying or renting a new home.

The specifics of your situation can also determine whether or not to count your home equity in your net worth. Generally, when using tools to tap your home equity, you may want to include your house as part of your net worth. But when calculating retirement savings, it’s a no-go.

Read on to learn more about when home equity counts in your net worth.

Why Is Knowing Net Worth Important?

Your net worth will fluctuate over time, but it can always be a valuable way to chart how your finances are going. If your net worth is negative, that means you have more debts than assets. This might encourage you to budget differently or focus more on paying off debt, especially high-interest debt.

If, however, your net worth is positive, that can help you see how you are progressing toward financial goals and what funds you will have available for, say, retirement.

Calculating Net Worth

At its most basic, net worth is everything you own minus everything you owe.

To calculate your net worth, tally the value of all or your assets, including bank accounts, investments, and perhaps the value of your home or vacation home. Then subtract all of your debts, including any mortgage, student loans, car loans, and credit card balances.

If the resulting figure is negative, it means that your debts outweigh your assets. If positive, the opposite is true.

There is no one net worth figure that everyone should be aiming for. Your net worth, though, can be a personal benchmark against which you can measure your financial progress.

For example, if your net worth continues to move into negative territory, you know that it is time to tackle debts. Hopefully, you’ll see your net worth grow, which can give you some idea that your savings plan is working or your assets are increasing in value.

Your home may, strangely, function as both an asset and a liability. Your home equity — the part of the home you actually own — can be an asset. But your lender may still own part of your home. In that case, mortgage debt is a liability.

As you track your home value and other assets to take your financial pulse, you may find that your home is simultaneously your biggest asset and biggest liability.

Recommended: What Credit Score Is Needed to Buy a Car?

When to Include Home Equity in Net Worth

Generally speaking, you may want to include your home as part of your total assets and net worth when you want to leverage the value of the equity you have stored there.

You can tap the equity in your home with a number of financial products. Here’s a closer look:

Home Equity Loan

A home equity loan allows you to borrow money that is secured by your home. You may be able to borrow up to 85% of the equity you have built up. For example, if you have $100,000 in home equity, you may have access to an $85,000 loan.

The actual amount you are offered will also be based on factors such as income, credit score (which may differ among the credit bureaus — say, between TransUnion vs. Equifax), and the home’s market value.

You repay the lump-sum loan with fixed monthly payments over a fixed term.

As with home improvement loans, which are personal loans not secured by the property, you can use a home equity loan to pay for home renovations.

Or you can use a home equity loan for goals unrelated to your house, like paying for a child’s college education or consolidating higher-interest debt.

Just remember that if you fail to repay the loan, the lender can foreclose on your home to recoup its money.

Home Equity Line of Credit

A home equity line of credit (HELOC) is not a loan but rather a revolving line of credit. You may be able to open a credit line for up to 85% of your home equity.

How do HELOCs work? You can borrow as much as you need from your HELOC at any time. Accounts will often have checks or credit cards you can use to take out money. You make payments based on the amount you actually borrow, and you cannot exceed your credit limit. HELOCs typically have a variable interest rate, although some lenders may allow you to convert a portion of the balance to a fixed rate.

HELOCs use your home as collateral. If you make late payments or fail to pay at all, your lender may seize your home.

Traditional Refinance

A traditional mortgage refinance replaces your old mortgage with a new loan. People typically choose this path to lower their interest rate or monthly payments.

They may also want to pay off their mortgage faster by changing their 30-year mortgage to a 15-year mortgage, for example, reducing the amount of interest they pay over the life of the loan.

How do net worth and home equity come into play? One important metric lenders use when deciding whether you qualify for a mortgage refinance is your loan-to-value ratio (LTV), how much you owe on your current mortgage divided by the value of your home.

The more equity you have built in your home, the lower your LTV, which can help you secure a refinanced loan and positively influence the rate of the loan.

Another option: A cash-out refinance vs. a HELOC.

Cash-Out Refinance

A cash-out refinance replaces your mortgage with a new loan for more than the amount of money you still owe on your house.

The difference between what you owe and the new loan amount is given to you in cash, which you can use to pursue a number of financial needs, such as paying off debt or making home renovations.

Your cash-out amount will typically be limited to 80% to 90% of your home equity, and interest rates are typically a little bit higher due to the higher loan amount.

Reverse Mortgage

A home equity conversion mortgage, the most common kind of reverse mortgage, allows homeowners 62 and older to take out a loan secured by their home.

Borrowers do not make monthly payments. Interest and fees are added to the loan each month, and the loan is repaid when the homeowner no longer lives there, usually when the homeowner sells the house or dies, at which point the loan must be paid off by the person’s estate.

When Does Home Equity Not Count as Part of Your Net Worth

There are a few instances when it doesn’t make sense to include your home in your net worth, or you aren’t allowed to.

Retirement Savings

If you’re using your net worth to get a sense of your retirement savings, it may not make sense to include your home, especially if you plan to live there when you retire.

Your retirement savings represent potential income you will draw on to cover your living expenses. Your home does not produce a stream of income on its own, unless you tap your equity using one of the methods above.

Applying for Student Aid

A family’s net worth can have an impact on eligibility for federal student aid. The more assets a family has, the more that need-based aid may be reduced.

However, the equity in a family’s primary residence is a nonreportable asset on the Free Application for Federal Student Aid (FAFSA®). Most colleges use only the FAFSA to decide aid.

Several hundred colleges, usually selective private ones, use a form called the CSS Profile, which does ask applicants to report home equity, though a number of schools, such as Stanford, USC, and MIT, have moved to exclude home equity from their considerations for aid.

When Becoming an Accredited Investor

An accredited investor may participate in certain securities offerings that the average investor may not, such as private equity or hedge funds. Accredited investors are seen to be financially sophisticated enough, or wealthy enough, to shoulder the risk involved with such investments.

To become an accredited investor, you must have earned more than $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the prior two years, or you have a net worth over $1 million. However, you cannot include the value of your primary residence in your net worth in most cases. (An exception worth noting: There are certain FINRA licenses that allow a person to become an accredited investor independently of one’s finances.)

Tips for Improving Net Worth

If you are looking to build your net worth, you might try these tips:

•  Rein in your spending. If your net worth is not rising as you would like, you might assess if you are spending too much. You might be shopping out of boredom, trying to keep up with your peers (aka, FOMO or Fear of Missing Out), or be experiencing what is known as lifestyle creep, when your expenses rise along with your income.

•  Deal with your debt. Having debt, especially high-interest debt like the kind you can incur with credit cards, can make it hard to grow your net worth. If you are struggling to get on top of debt, you might look into debt consolidation options or working with a low-cost or free credit counselor.

•  Consider automating your savings. Many financial experts advise that you “pay yourself first” and immediately transfer some funds into savings when you get paid. In one popular budgeting method, the 50/30/20 Rule, it’s recommended that 20% of your take-home pay go toward savings and debt. In addition, you would probably want that money to grow, whether that means putting it in a high-yield savings account or investing in the market.

The Takeaway

Whether or not you include your home in your net worth will depend largely on what you’re trying to accomplish. If you plan to tap your equity, then it is an important figure to include. But it’s not always included when it comes to things like student aid or retirement income.

While your mind is on home equity, maybe you’ve thought about a cash-out refinance, or maybe it’s time to sell and buy anew.

If you’re curious about home financing or mortgage refinancing options, see what SoFi offers. With competitive rates, flexible terms, and a simplified online application process, we can help you find the right loan product for your needs.

Photo credit: iStock/Chainarong Prasertthai