What Is a Jumbo Loan?

When it comes to french fries, ice cream, popcorn, or any other treat that delights your taste buds, it’s an easy decision: A jumbo order is the perfect fit. With home loans, it’s a little trickier. What is a jumbo loan? Could securing one be the key to you achieving your dreams of homeownership?

What Is a Jumbo Loan?

What’s in a name? When it comes to jumbo loans, the name offers a fairly large hint. As you might expect, one of the defining characteristics of a jumbo loan is its size. According to Investopedia, a jumbo loan is a home loan for an amount larger than the limit set by the Federal Housing Finance Agency (FHFA).

Basically, the FHFA sets annual limits on the size of mortgages that are eligible to be purchased, securitized, or guaranteed by Fannie Mae or Freddie Mac, the government-sponsored enterprises that help to nurture homeownership and keep the mortgage market fluid by providing a secondary market for home loans. In 2019, the maximum loan limit is $484,350 in the majority of the United States, but it varies from county to county. Therefore, anyone needing to borrow $484,351 or more for their home purchase will need to secure a jumbo loan in most areas.

What Is a Jumbo Loan Used For?

As SmartAsset indicates, jumbo loans can be used for a variety of purchases. If you’re purchasing a luxury home, a jumbo loan might be the tool needed for the job. However, majestic mansions, upscale apartments, and deluxe hideaways aren’t the only properties that might require a jumbo loan. It’s worth noting that the FHFA’s limit is often higher in areas where housing is expensive. For example, the 2019 maximum loan limit is $726,525 in Hawaii, Alaska, Guam, and the U.S. Virgin Islands. Even with that higher ceiling, a jumbo loan might be the key to buying even a modest home in competitive housing markets with high property values.

What Makes a Jumbo Loan Different?

While the size of the loan is the primary thing that sets jumbo loans apart from other mortgages, there are other considerations to keep in mind. NerdWallet mentions the following differences:

• Jumbo loans typically have higher interest rates. Extending a bigger loan presents a bigger risk to a lender, so borrowers may need to accept a higher interest rate. However, this depends on the lender, the loan, and the borrower’s situation. In many cases, lenders can offer competitive interest rates, so it’s a good idea to shop around.
• Jumbo loans generally require a heftier down payment. While there are several loan products that allow qualified borrowers to secure a conforming mortgage with little or no down payment, borrowers planning to use a jumbo loan will typically need a down payment of at least 10 percent. Most lenders expect a 20-percent down payment for a jumbo loan.
• Jumbo loans have higher fees and closing costs. Because of their larger size and greater complexity, borrowers using a jumbo loan will pay more at the closing table.
• Qualifying for a jumbo loan is more challenging. With the additional risk involved, lenders take extra steps and set higher standards when vetting aspiring homeowners for a jumbo loan.

How Do You Qualify for a Jumbo Loan?

As U.S. News & World Report explains, the requirements for a jumbo loan are similar to other mortgages, but they tend to be more stringent:

• The borrower’s financial history, income, and credit are subject to heavy scrutiny, so more documentation may be requested.
• A credit score of at least 680 is required; in some cases, 720 may be needed.
• The allowable debt-to-income ratio is normally 43 percent or less.
• Cash reserves equaling a minimum of three months of housing expenses are expected.
• Down payments of 10 to 20 percent are the norm.

When you’re searching for a jumbo loan that offers big benefits, turn to PrimeLending Twin Cities. As a trusted lender, we’re able to offer a variety of jumbo loan products. Are you searching for an adjustable-rate mortgage or a fixed-rate mortgage to purchase your dream home? Would you like a renovation loan to transform a fixer upper into the vacation home that you’ve always wanted? Are you interested in snagging a better interest rate or accessing your equity with a cash-out refinance loan? Whatever your goal, we have an option that fits your needs. Our team of knowledgeable loan officers would be happy to help you explore the possibilities and offer expert guidance as you choose the right loan product. Contact PrimeLending Twin Cities today.