What Is a Jumbo Loan?
Many homebuyers are familiar with conventional loans, also known as conforming loans, which are the most common type of home loan. They’re backed by Fannie Mae and Freddie Mac and serviced through banks, credit unions, or mortgage companies. Jumbo loans, on the other hand, are nonconforming loans used to finance more expensive homes that exceed standard loan limits. Since they don’t fit into the terms set by the Federal Housing Finance Agency (FHFA), jumbo loans aren’t backed by Fannie Mae and Freddie Mac. This means they’re riskier for lenders, but they’re also a necessity for homebuyers living in more expensive neighborhoods.
Who Needs a Jumbo Loan?
Jumbo loans are more common in high-cost regions, where typical home prices exceed conforming loan limits. In 2023, the FHFA loan limit is $726,200 for most of the country (but as NerdWallet notes, the limit is $1,089,300 or higher for states like Hawaii). If you’re looking to purchase a home above conforming loan limits and you can’t purchase the home upfront with cash, you’ll need a jumbo loan to finance the home. Jumbo loans are an option for primary residences, vacation homes, or investment properties.
However, these loans have stricter eligibility requirements since they’re a higher-risk investment for lenders. If you’re in the market for a jumbo loan, make sure you meet the minimum requirements.
Where Can You Get a Jumbo Loan?
Experienced mortgage brokers like those at Rob’s Mortgage Loans (https://robsmortgageloans.com/) can help homebuyers determine whether they meet the qualification rules for jumbo loans. These rules include:
- Credit score of at least 700
- Lower debt-to-income ratio
- Cash reserves for a 10-20% down payment plus at least a year’s worth of mortgage payments
As CNBC suggests, it’s important to consider not only whether you qualify for a jumbo loan, but whether a jumbo loan fits your financial situation. Mortgage brokers can help you determine whether a nonconforming loan is the best option for you, and they can connect you with lenders who will provide the best mortgage terms for your needs.
Takeaways
Jumbo loans are nonconforming loans for homes with values that exceed the FHFA limits for conforming loans. Homebuyers living in pricier regions or looking at luxury homes may need to finance their home through a jumbo loan. Unlike conforming loans, jumbo loans aren’t secured by Fannie Mae and Freddie Mac, meaning that lenders take a larger risk issuing jumbo loans if borrowers default on their payments. This is why jumbo loans have stricter eligibility requirements and a more involved application process. However, for buyers who meet those stricter requirements, jumbo loans may be an effective way to finance a high-cost home.
