A jumbo loan is a type of mortgage designed to finance high-value homes that require loans above the standard conforming loan limit. These limits are regulated by the Federal Housing Finance Agency (FHFA). They vary by location, but for most of the U.S., the 2020 limit currently stands at $510,400 for one-unit homes. Jumbo loans are not backed by government-sponsored entities like Fannie Mae and Freddie Mac. Otherwise, jumbo loans are just like conforming loans, as they come in fixed-rate and adjustable-rate variations with multiple term lengths.
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What Is a Jumbo Loan?
A jumbo loan is used to buy a home that requires a mortgage that exceeds the maximum conforming loan limits set by the FHFA. These limits also double as the maximum mortgage amounts that can be purchased or backed by Fannie Mae and Freddie Mac. These government organizations are among the most common players in the mortgage industry, and they’re behind most conforming mortgages.
If you qualify for a jumbo loan, you can use it to cover your primary residence or the mortgage on an investment property, vacation home or second home. They are typically used to buy homes in high-end real estate markets.
When it comes to the mortgage terms available for jumbo loans, they’re essentially the same as conforming loans. For example, jumbo loans are often available in the common 30- and 15-year fixed-rate terms. Some lenders even offer other terms, including 10- or 20-year fixed. If you prefer adjustable-rate mortgages (ARMs), you could go for a 10/1, 7/1 or 5/1 term.
What Are the Jumbo Loan Limits for 2020?
Conforming loan limits typically vary by county. The FHFA announced in Nov. 2019 that the conforming loan limit for most counties would be increasing from $484,350 in 2019 to $510,400 in 2020. This change was in response to the average U.S. home value raising by about 5.38% between the third quarters of 2018 and 2019.
In some states, counties and territories, there are higher conforming loan limits. These places are referred to as “high-cost areas.”
For example, Alaska, Hawaii, Guam and the U.S. Virgin Islands have a jumbo loan limit of $765,600, which is as high as the limit can possibly get for 2020. Other counties may have limits somewhere between $510,400 and $765,600. The limit in the county you’re looking to move to will depend on the competitiveness of its real estate market and average home value.
How to Qualify for a Jumbo Loan
Qualifying for a jumbo loan is much more difficult than qualifying for a conforming loan. As with any mortgage, there are some hoops to jump through to secure funding for your new home.
When applying for a traditional mortgage, lenders usually prefer for your debt-to-income (DTI) ratio to be below 36%. If you’re applying for a jumbo loan, however, you generally need to have a lower DTI ratio. Lenders may be a bit more lenient if you have a lot of cash, though.
Jumbo loan applicants also typically need a higher FICO credit score than those applying for a conforming loan. Most lenders prefer you have a credit score around 700, though some may call for a score of at least 720.
Before starting the application process, it’s a good idea to have your personal financial documents in order. These include your most recent pay stubs, 1099 and W-2 forms, tax returns and bank statements. It’s critical that you have at least six months of cash ready to put toward your jumbo loan, particularly if you’re an entrepreneur or you work for yourself. Also, don’t forget your mortgage preapproval checklist.
As always, it doesn’t hurt to shop around and compare mortgage rates for jumbo loans. If you’re looking to get one, your best bet is to check out one of the big banks or find investors who are part of the secondary mortgage market. There are a variety of jumbo loans to choose from, including ones with adjustable and fixed interest rates.
Comparing Jumbo Loans & Conforming Loans
If you’re buying an expensive home, you can expect its peripheral costs to also be a bit pricey. The same principal applies to jumbo loans, especially if they’re well above the conforming loan limit for your county.
While many lenders will consider lowering their down payment requirements for jumbo loan applicants, most still call for the industry standard of 20%. If you make a down payment of less than 20%, you may be on the hook for private mortgage insurance (PMI), which isn’t cheap. These stipulations are the same with conforming loans.
Any time you’re dealing with a larger mortgage, fees are inherently going to be higher. These usually include origination fees, title insurance, inspection fees and service fees, which are all collectively known as “closing costs.” Be prepared to pay for these when you finally close on your new home.
Because a jumbo loan cannot be backed by Fannie Mae or Freddie Mac and they are quite large, their interest rates may be higher than their conforming loan counterparts. On the bright side, many lenders’ jumbo and conforming rates are getting closer than they once were. In general, though, expect to get a somewhat high interest rate.
Depending on the home you want to buy and the county you’re looking to buy in, a jumbo loan might be necessary to reach your goal of homeownership. But because they can be rather expensive loans, make sure you can truly afford to keep up with the payments. No home, no matter how beautiful, is worth jeopardizing your financial security.
Home Buying Tips
- Buying a home is a major financial move. If you’re wondering how your purchase could affect your financial plan, a financial advisor can help. Finding the right financial advisor doesn’t have to be hard, as SmartAsset’s free tool matches you with financial advisors in your area in just five minutes. Get started now.
- Are you unsure if you should be seeking a jumbo loan for your home purchase? Try SmartAsset’s home affordability calculator to get a better picture of both what you can afford and what kind of homes you should be aiming for.
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