A jumbo loan is used to finance a home when the price exceeds the conforming loan limit, which is $548,250 for most of the U.S. in 2021.
It’s important to understand why you would need a jumbo loan and how they differ from conforming loans because it impacts your mortgage process quite a bit. Jumbo loans have more strict qualifying requirements and usually require more money for the down payment.
This post will cover the basics of jumbo loans, when you would need one, and their stricter requirements.
Why Do Conforming Loans Have Limits?
To understand jumbo loans and their place in mortgage financing, we first need to establish what conforming loans are and their limitations.
A conforming loan is one in which the home’s purchase price falls within the maximum put in place by the Federal Housing Finance Agency (FHFA). The limits exist to both home loans across the country widely available and also sustainable. There are many benefits of FHA loans, and we encourage you to read more about them.
On the flip-side, when a purchase exceeds these limits, it’s called nonconforming, better known as a jumbo loan.
WHAT ARE THE NON-JUMBO LOAN LIMITS?
Another way to think about that question is: At what threshold will I have to get a jumbo loan?
The FHFA sets the conforming loan limits and can adjust them as home prices rise. For 2021, the limits are:
- $548,250 for single-family homes in most of the U.S.
- $822,375 for high-cost areas, including the Washington, D.C. metro area, where single-family home prices are above average.
To see what the conforming loan limits are for your county, take a look at this nationwide, interactive map.
WHY DO THESE LOAN LIMITS MATTER?
When your purchase exceeds the conforming loan limits, you’ll have to finance using a jumbo loan. Since these loans aren’t backed by any government agency, they present a higher risk to lenders. Because of this, lenders usually have more strict qualification requirements for them.
Some common jumbo loan requirements are:
- Higher credit scores. The average minimum credit score for a jumbo loan is around 680, and can vary as each lender sets their specific threshold.
- More savings. Lenders will want to see you have cash saved up and not too much debt accumulated.
- Larger down payment. This will depend on your credit history, but most lenders will expect a larger down payment of around 20%.
- A second appraisal. You might be required to obtain a second opinion on your home’s value, which would come with the added cost as well.
WHEN DOES IT MAKE SENSE TO TAKE OUT A JUMBO LOAN?
As you’ve learned about why jumbo loans exist and how they differ from other government-backed loan programs, you might now be wondering if a jumbo loan is the best option for you to get into the home you’ve been dreaming of.
If you’re buying a luxury home, or one with amenities that put the price over the conforming loan limits, then you’ll need to consider financing with a jumbo loan. It’s sometimes the only option for financing more expensive properties. Nonetheless, it’s still important to understand how these loans work so you can be best equipped to make an educated decision for your financial position.
If you’re in the market for a home that would require financing with a jumbo loan, you’ll want to get expert advice on the program, the associated costs, and tax implications.
Our Loan Officers are gurus at turning enthusiastic buyers into proud homeowners. We would love to connect with you to learn more about your homeownership goals and guide you in your buying mission.