evaluating jumbo loans

What is a Jumbo Loan?

By Rae Oakley, Flyhomes Mortgage

If you have considered taking out a mortgage, you may have come across this peculiar-sounding loan type: the Jumbo Loan. ‘Jumbo’ refers to the size of the loan, and it’s a term you should be comfortable with, especially if you are looking to buy in high cost areas like Seattle or the San Francisco Bay Area. 

So what is a Jumbo loan anyways? 

A Jumbo home loan is any loan that exceeds the conforming loan amounts set by the Federal Housing Finance Agency. As of 2020, the conforming loan limit for most of the United States is $510,400. Anything above that is considered a Jumbo loan.

Notice I wrote most of the US. There are certain high-cost areas, like Seattle and the Bay Area, that have higher conforming loan limits. High-cost areas are counties or census areas where the local median home value is more than 115% of the baseline conforming loan limit. These higher limits are known as High Balance loan limits. In King County, for example, that limit is currently $741,750 for a one unit property. In San Francisco County, it is $765,600 – the ceiling for high cost areas. Look up the loan limit for your county or census area here.

Ok, so why all the fuss around loan sizes? It’s because loans under the conforming loan limits are easier to sell on the secondary market due to the fact that government sponsored entities Fannie Mae and Freddie Mac will purchase them. Since Fannie and Freddie can’t purchase any loans above these limits, there are fewer investors willing to purchase Jumbo loans, ultimately making them a riskier product for lenders to offer.

Qualifying for a Jumbo Loan

Because Jumbo loans are riskier than conforming loans, Jumbo Lenders will make their approval requirements much stricter. You’ll oftentimes need a higher credit score, a larger down payment percentage, more cash in the bank for your reserves, and a whole slew of additional characteristics that communicate to the lender that you are not likely to default on your mortgage. These heightened requirements generally make Jumbo loans much more difficult to qualify for than conforming loans. 

For more information on conforming loan types, read our post on Common Loan Types.

Another way that Jumbo lenders mitigate risk is by increasing their interest rates. You might find a Jumbo lender quoting rates that are 0.25%-1.00% higher than what you are seeing for conforming loan amounts. However, it’s not a given that Jumbo rates will be higher than conforming rates – some might even be lower. Be sure to get an official quote before making a decision on what company to use.

Paying for a Jumbo Loan

In addition to stricter qualification requirements, Jumbo loans are usually more costly than conforming loans. Underwriting, processing, and appraisal fees are all typically more expensive, so be prepared to see higher closing costs with a Jumbo loan. Larger down payment requirements, typically 10-20% with a Jumbo Loan, means more of your assets are tied up in a down payment, reducing your available liquid assets. And since you are taking out a larger loan, you’ll probably end up paying more in interest over the course of the loan term.

So should you take out a Jumbo Mortgage?

It depends. If you are considering a loan amount near the conforming limit, putting down a little extra to get your loan amount under the limit might make your mortgage experience a bit easier. If you are able to qualify for a jumbo mortgage and are comfortable with your quoted interest rate and closing costs, then we encourage you to go for it. It comes down to your unique financial picture, as well as your goals for the home. 

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