When you start to explore your mortgage options, you may hear the term “jumbo loan.” If you do, you are looking at properties that are more expensive for the area. If you are considering homes requiring a mortgage that exceeds $417,000, it’s a good idea to find out more about jumbo loans and discuss them with your lender.
What makes a loan jumbo?
A loan is considered a jumbo if it exceeds what is known as the conforming loan limit. The current conforming loan limit for a single-family home is $417,000 for all states except for Hawaii and Alaska, where it is $625,500.Footnote 1
However, if you live in a federally designated high-priced market, there are conforming high balance limits available for certain loan programs.Footnote 2 These loans have higher interest rates and stricter underwriting requirements than standard conforming loans, but are generally priced lower than jumbo loans. Additionally, limits may be different for multi-unit properties.
Homebuyer tip: Talk to your lender to understand the loan limits for your area. The Federal Housing Finance Agency also provides maximum loan limits by state and county.
How are jumbo loans different?
Qualifying for a jumbo loan usually requires lower Glossary Term: debt-to-income ratios
, higher Glossary Term: credit scores
, larger Glossary Term: down payments
, and higher Glossary Term: reserves
(or emergency funds) than conforming loans. Jumbo loans can also have higher interest rates compared to a conforming loan. Differences vary by lender, so ask yours to provide you with their specific jumbo loan costs and requirements.
What are your options?
A jumbo loan is one potential way to buy a high-priced home, but other options include:
- Increasing your down payment. This is the simplest option. If you can put more cash toward the down payment, you will borrow less. This could be especially helpful to you if the mortgage you are considering is only slightly above the conforming loan limit.
- Obtaining two mortgages. This is also called a Glossary Term: combination loan. This option is more complex. It entails taking out a second, smaller mortgage at the same time as the first. By doing this, your first, larger mortgage would conform to the loan limit, and you may avoid some of the increased requirements and higher rates of a jumbo. However, the interest rate on a second mortgage is typically higher than on a first mortgage, so you’ll want to calculate the costs and potential savings carefully. In addition, if you took out two mortgages, you would be responsible for paying both of them each month. So you would need to be sure that you could manage the combined payment. Not everyone will be eligible or qualify for this loan option.
If you are considering a jumbo loan, talk with your lender. Together, you can discuss different scenarios to see if it makes sense for you to save for a larger down payment before you buy, get two loans, or take out a jumbo loan. Whatever option you choose, you should be confident that you will be able to comfortably afford the loan(s) you obtain. Understanding the full costs and terms of various loan options can help you make the best decision for your situation.
For more information on your loan options, see Understanding your mortgage options.