A jumbo loan is a mortgage that has a loan amount that is higher than the conforming loan limit. This limit is set by the Federal Housing Finance Agency (FHFA) and varies by county.
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What is a Jumbo Loan?
A jumbo loan is a mortgage that has a maximum loan amount above the conforming loan limit set by the Federal Housing Finance Agency (FHFA). In 2018, the jumbo mortgage limit for single family homes in most areas of the country is $453,100.
Jumbo loans are more expensive for lenders to originate and service, so they typically carry higher mortgage rates than conforming loans. The spread between conforming and jumbo rates has been fairly stable recently, but that could change if economic conditions shift and put upward pressure on jumbo rates.
While some lenders origination jumbo loans with as little as 10% down, most require at least 20% down to offset their higher risk. That’s why they’re also sometimes called “non-conforming” or “non-QM” (non-qualified mortgage) loans.
How Do Jumbo Loans Work?
Jumbo loans are home mortgages that exceed the conforming loan limit — the maximum loan amount that Fannie Mae or Freddie Mac will back. Lenders set their own limits on what they consider a jumbo loan, but in general, it’s anything above $417,000 for a single-family home and $625,500 for a four-plex apartment. To qualify for a jumbo loan, borrowers typically need to have good credit and a low debt-to-income ratio. They may also need to provide extra documentation to prove their ability to repay the loan.
The biggest Jumbo Loan benefit is that it allows borrowers to finance expensive homes. In most U.S. counties, the conforming loan limit is $424,100. So if you want to buy a home that costs more than that—say, $600,000—you’ll need a Jumbo Loan.
Jumbo Loans also come with some risks for both lenders and borrowers. Because these loans are not backed by Fannie Mae or Freddie Mac, they may be harder to qualify for and come with higher interest rates than conforming loans—usually about 0.25% higher. And if you’re looking to get a adjustable-rate mortgage (ARM), your interest rate could go up even more after the fixed-rate period expires.
Jumbo Loan Benefits
A jumbo loan is a type of mortgage loan that exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA). Jumbo loans are available in both fixed-rate and adjustable-rate mortgage (ARM) options.
Jumbo loans can be a good option for borrowers who are looking to purchase a high-priced home or property. Some of the benefits of a jumbo loan include:
-You may be able to get a lower interest rate than with a conventional loan
-You may be able to avoid private mortgage insurance (PMI)
-You can finance up to 100% of the purchase price
-You may be able to get a longer loan term
Jumbo Loan Drawbacks
Even with all these great benefits, there are some drawbacks to obtaining a jumbo loan that potential borrowers should be aware of. One such drawback is the higher interest rate that comes with these loans. This is because lenders perceive jumbo loans as being riskier than smaller loans, and thus charge a higher rate to offset this risk. Additionally, borrowers may be required to pay for private mortgage insurance (PMI) on their loan if they do not make a down payment of at least 20%. This can add hundreds or even thousands of dollars to the borrower’s monthly payments. Finally, because jumbo loans are not as common as smaller loans, it may be more difficult to find a lender who is willing to provide them.
How to Qualify for a Jumbo Loan
In order to qualify for a jumbo loan, you will need to have a credit score of at least 680. However, some lenders may require a higher credit score in order to approve you for a loan. In addition to having a good credit score, you will also need to have a steady income and a low debt-to-income ratio. Most jumbo loans require a down payment of at least 20% of the purchase price.