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A jumbo mortgage is one that is larger than the conforming loan rates set by the Federal Housing Finance Administration (FHFA). A conforming loan is one that can be purchased by Fannie Mae or Freddie Mac, so a jumbo loan is one that’s too large to meet this requirement.
Every year, the FHFA announces the conforming loan limit. Anything above that amount is considered a jumbo loan. For 2021, the conforming limit for most homes in the country is $548,250 However, in places where home prices are generally higher, the limit is higher. For example, in Hawaii and Alaska, the conforming loan limit is $822,375.
As with most other mortgages, it’s important to shop around for jumbo mortgage rates that fit your needs and reflect your situation.
Learn More: What Is a Mortgage Rate and How Do They Work?
To qualify for a jumbo loan, you generally need a credit score of at least 700 and a down payment of 10% to 30%.
Additionally, lenders also weigh other factors, such as debt-to-income (DTI) ratio, employment history, and cash reserves. Some lenders require you to have between six to 12 months of payments available to qualify for the best jumbo rates.
Make sure to shop around for jumbo mortgages and compare the interest rates, terms, and requirements of each mortgage lender.
When shopping for a jumbo loan, you might end up with a higher mortgage rate or encounter stricter requirements. But you can use Credible to help you compare options and get personalized prequalified rates that are right for you.
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As a Credible authority on mortgages, Chris Jennings covers topics including home loans and mortgage refinancing. His work has appeared in Fox Business and GOBankingRates.
A conventional loan is a home loan that isn’t backed by the government/. Unlike FHA, VA, or USDA loans, most conventional loans are instead purchased by two government sponsored enterprises, Fannie Mae and Freddie Mac.
When it comes to conventional loans, the law restricts the size of the loans Fannie Mae and Freddie Mac can purchase. This limit, known as the conforming limit, changes annually and varies by region. For 2022, the conforming loan limit in most areas of the U.S. is $647,200; in higher-cost areas, the limit can run as high as $970,800. Loans that fall within the conforming limit are called conforming loans.
Conventional loans with amounts higher than the conforming limit are called non-conforming loans, or jumbo loans. A conventional loan can be either conforming or non-conforming, but a jumbo loan is always non-conforming.
Whereas conforming loans limit lenders’ risk because the loans are purchased by Fannie Mae or Freddie Mac, lenders usually hold jumbo loans themselves. That makes jumbo loans a risky product for lenders.
To reduce the risk, lenders typically set higher credit and financial standards for jumbo loans than they do for conforming loans.
Here are some of the requirements you can expect with a jumbo loan, though they vary from lender to lender:
Credit score: Lenders generally want to see good credit scores for jumbo borrowers — at least 680 or higher.
Down payment: Whereas you might be able to get away with a 3% down payment on a conforming loan, jumbo loans usually limit loan-to-value ratios to 80%, so you’ll need at least 20% down to qualify.
Debt-to-income (DTI) ratio: The lender will look at all of your debt and might require a debt-to-income ratio as low as 36% vs. the 45% maximum typically allowed for conforming loans.
Cash reserves and other assets: Expect to show proof of cash reserves — that is, savings you can easily tap into to cover your payments if you fall on hard times — as well as sufficient income to cover your monthly mortgage payment.
You should also be aware that closing costs can be significantly higher for a jumbo loan than for a conforming loan. The extra costs could leave you with a smaller cash reserve or down payment than you anticipated, which can affect your rate and your ability to qualify for the loan.
But the average rate is just that — an average. Market conditions, rates from competing banks, and your qualifications all help determine the rate you ultimately end up with. Despite the added risk to lenders, jumbo loans don’t always have higher rates compared to conforming loans; it’s possible you might qualify for a jumbo rate that’s less than the rate for a conforming loan.
To find the best rate, it’s important that you shop around and compare multiple lenders. Credible can help you with your search.
Jumbo loans are generally a matter of necessity rather than choice. If you need a home loan that exceeds the conforming limit, you’ll probably need to take out a jumbo loan. However, there are a few alternative options you can explore.
The first is a piggyback loan — sometimes called an 80/10/10 loan — which is essentially a second mortgage that you take out at the same time as your primary loan. It may help you avoid a jumbo loan by financing the amount that exceeds the conforming loan limit.
For example, if you want to purchase an $800,000 home but don’t have a large enough down payment to limit your loan to $647,200 (the conforming loan limit for 2022 in most areas), you could:
1. Finance $640,000 (80%) with a first mortgage, leaving you $160,000 short of the purchase price.
2. Pay $80,000 (10%) down, leaving you $80,000 short of the purchase price.
3. Piggyback a second mortgage loan for $80,000 (10%), which provides you enough of financing to purchase the home.
With this option, you also avoid private mortgage insurance even though you’re putting down less than 20% out-of-pocket. That’s because the piggyback loan serves as the additional 10% down.
The other loan option is a VA loan. There are no loan limits for VA loans, so as long as you meet the military service requirements and the lender’s credit and income requirements, you can borrow as much as you qualify for.
You can refinance a jumbo loan like you would a conforming loan, albeit with the same caveats as for a jumbo purchase loan — you’ll have to be a highly qualified borrower. Also, because of the higher risk, not all lenders originate jumbo refinance loans, so you might have to shop around again.
There are plenty of good reasons to refinance your jumbo mortgage, such as:
Reducing your interest rate
Locking in a fixed rate from a jumbo adjustable-rate mortgage
Extending the term of your loan to lower your payments
Tapping your equity with a jumbo cash-back refinance loan
Jumbo refis do have some drawbacks, though. For one, they can take a long time to get approved due to the tighter lending requirements. And you’ll most likely pay closing costs amounting to 2% to 5% of the amount you borrow — that can be a significant expense for a large loan.
That said, you don’t necessarily have to refinance into another jumbo mortgage. If your current loan balance is less than the conforming limit, or you can pay it down enough to qualify, you can refinance into a conforming loan. You’ll still have to pay closing costs, but you’ll have more lenders to choose from and probably close faster.
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