Taking out a jumbo mortgage costs a lot less than it did last year.

But you'll still need a substantial income, relatively little debt and a big down payment (or lots of equity if you're refinancing) to qualify for one of these mortgages.

Jumbo loans are mortgages that are too large for the two government-owned companies that provide most of the money for home loans to finance.

Congress only allows Freddie Mac and Fannie Mae to buy loans from banks and mortgage companies if they're for less than $417,000 in most parts of the country or up to $729,500 in high-cost cities such as New York and San Francisco.

Jumbo loans have cost substantially more than loans that Freddie and Fannie could buy over the past couple of years, making them unaffordable for many buyers.

But the average cost of a 30-year, fixed-rate jumbo loan fell to 5.95% in mid-November, according to our weekly survey of major lenders.

That was the first time it had been below 6% since July 2005. Indeed, the average rate had been over 7% from July 2007 to July 2009, peaking at nearly 8% in October 2008.

Although the average cost of a jumbo loan rose in December, our database of mortgage rates still shows lenders in most cities offering 30-year, fixed-rate loans for 6.25% with no points and fees of $2,000 or less.

Adjustable-rate loans are also an option you should consider.

They don't make much sense for non-jumbo loans, because ARMs aren't all that much cheaper than fixed-rate mortgages.

But jumbo ARMs are considerably less expensive than fixed-rate jumbo loans.

In Pasadena, Calif., for example, the cheapest 30-year, fixed-rate mortgage with no points and fees of less than $2,000 costs 6.25%.

But with a 5/1 ARM -- that's a mortgage that maintains its initial rate for five years before it begins to reset -- you'd only pay 5.125%.

You'll find similar differences in most markets, and saving one percentage point can make a huge difference in your monthly payments when you're borrowing that much money.

If you're planning to move before an ARM begins to reset, typically five or seven years, then it makes even more sense.

And you can avoid many of the problems homeowners encountered with ARMs they bought during the housing boom by making sure the rate resets no more than once a year and has reasonable limits on how high it can go and how much it can increase each year.

When the financial crisis struck in late 2008, most lenders simply stopped doing jumbo loans.

But a growing number of banks and mortgage resumed making those loans over the past few months.

"It's a little easier to get a jumbo loan now than it was last year," says Paul McFadden, a loan officer with The Legacy Group in Bellevue, Wash. "I continue to see the market improve."

The big hurdle is proving that you can make the substantial $3,000 to $5,000 a month payments these loans require. You'll need to:

• Fully document your income and assets over the past several years.
• Have a credit score of at least 720, which means you need an average or better than average credit history.
• Show that your monthly mortgage payments will require no more than 36% to 38% of your pretax income.
• And demonstrate that your total debt payments, including auto loans and credit card payments, won't consume more than 41% of your pretax income.

You should also be prepared to put at least 20% down on the house or have at least 20% equity for a refinancing. The bigger the loan, the higher the percentage will be.

If you can do that, you have a chance to take advantage of the best jumbo loan rates we've seen in several years.

"Jumbo loans were dead when this credit crunch came," says Jason Bonarrigo, senior mortgage banker at Wells Fargo in Boston. "Now we're definitely doing more of them."

By Sally Herigstad

Interest.com Contributing Editor