What Is a Jumbo Loan? What You Need to Know
For home buyers who want to buy a property with a big price tag, jumbo loans are a clear path to securing a mortgage. Most often, jumbo loans are necessary to buy luxury property. However, in high cost of living areas, jumbo loans may be required to purchase modest homes as well. Either way, a home buyer who wants to take out a loan that is higher than the conforming loan limit must do so with a jumbo loan. Knowing the difference between a jumbo loan and other types of loans can help you get a loan for the house you want to buy.
What Is the Conforming Loan Limit?
In most cases, the conforming loan limit is $726,200. However, the conforming loan limit can vary, just as the cost of living varies. In areas that have a high cost of living, the conforming loan limit may be much higher. And, the conforming loan limit changes over time. When this article was first published on 10/8/18, the conforming loan limit was $435,100. Over time it changes to reflect home prices.
How Do Jumbo Loans Compare to Conforming Loans?
To understand the difference between a jumbo loan and a conforming loan, the borrower must understand the details of both loans.
A conforming loan is a loan that falls below the limit set by government-sponsored entities (GSEs). Conventional loans, FHA loans, USDA loans and VA loans are all conforming. They share many of the same characteristics, although there is some variety between them.
Low or No Down Payment
FHA loans require only a 3.5% down payment, whereas USDA and VA loans require no down payment at all. Conventional loans usually require a down payment of 20% or more, though there are exceptions.
Flexible Credit Requirements
Many conforming loans are available to people who have lower credit scores. An example of this is the FHA loan, which can be made available to buyers with FICO ® credit scores of at least 580 or higher. The exception to this is the conventional loan, which usually requires a higher credit score.
Mortgage Insurance Requirements
Mortgage insurance is insurance that protects the lender in the event of a default. USDA loans and FHA loans require mortgage insurance, and in some cases conventional loans may require mortgage insurance as well.
Jumbo loans are different from conforming loans because they usually have stricter credit requirements and usually require a down payment of 20% or more. Terracina home buyers who want to take out a jumbo loan should have a credit score of at least 700 points.
Some jumbo loans can be acquired with less than 20% down, but this is the exception rather than the rule. Jumbo loans may or may not require mortgage insurance, depending on the lender's requirements.
Are There Any Risks to Taking Out a Jumbo Loan?
Interest rates on jumbo mortgages can be slightly higher than conforming loans, so jumbo loans can be slightly more expensive than other loans. Jumbo loans are also more difficult to refinance, because they're so large. In times of financial crisis, homeowners with jumbo loans may be at higher risk for defaulting on their mortgage.
In addition, when the market fluctuates, more expensive homes may experience larger reductions in equity, which can more easily put the homeowner underwater.
Are There Alternatives to Taking Out a Jumbo Loan?
Instead of borrowing a jumbo loan, some home buyers often may take out multiple conforming loans. These are called "piggy back" loans. Piggy back loans come in different combinations like 80% of the purchase price put down on one loan, and 20% of the purchase price put down on the other. This has been a preferable loan combination in the past because it enables the home buyer to avoid paying mortgage insurance. Piggy back loans have stricter credit requirements than some conforming loans. Most home buyers need a credit score in the high 600's or higher.
Piggy back loans have become more popular since the financial crisis, however, borrowers often find that taking out multiple mortgages makes managing mortgage payments more difficult. If getting a jumbo loan is an option, many home buyers will take it.
What Can You Do To Get a Jumbo Loan?
Home buyers who want to qualify for a jumbo loan can start by talking to a mortgage lender to find out what kind of paperwork will be required in order to be pre-approved. It's best to have all of this paperwork in order when the application is turned in, to ensure a smooth approval process.
Often people who decide to get a jumbo loan must shop around before they can find a lender that will meet their needs. Not all lenders offer jumbo loans.
Contact A Lender to Get Started
If you're a home buyer who would like to purchase a home with a high price tag and you think that jumbo loans are right for you, now is the time to get started. Contact a mortgage lender in your area to find out more about how you can take out a jumbo loan.