Jumbo loans: Everything you need to know

If you’re buying a large new house or just trying to place the winning bid in today’s current seller’s market, you may find yourself needing to get a jumbo loan. Just like the name implies, a jumbo loan is a type of mortgage that’s larger than a conventional home loan. It’s one that exceeds the funding criteria set by Fannie Mae and Freddie Mac, which are the government-sponsored entities that buy mortgages from lenders and package and sell them to investors.

You can get a jumbo mortgage for the purchase of a primary residence, vacation home or investment property. Before you sign on the dotted line, though, it’s important to understand how they work.

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What is a jumbo loan and how is it different from a traditional mortgage?

In most counties in the United States, a jumbo loan—also called a non-conforming loan—is $548,250 or more for 2021. In high-cost areas of the country where it’s more expensive to live, the limits are higher. For example, several counties in California, New York, and Hawaii have limits of $822,375 for 2021. Any loan that is less than the limit is called a conforming loan.

The key difference between a jumbo, or non-conforming, mortgage and a conforming mortgage is the size. Otherwise, both types of loans offer fixed- or adjustable-rate options. The payment schedule is usually the same, and borrowers are offered a variety of terms.

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Typical jumbo mortgage rates

Unlike traditional or FHA mortgages, jumbo loans aren’t guaranteed by Fannie Mae and Freddie Mac, and they’re considered riskier for lenders. As a result, they often come with higher rates. You may need to shop around more for a jumbo mortgage loan than you would for a traditional, conforming mortgage.

As of April 29, 2021, the average annual percentage rate for a 30-year jumbo loan was 3.28%, while a conforming 30-year fixed-rate was 3.01%, according to Zillow. To find the best jumbo mortgage rate, visit Credible to compare current rates from multiple mortgage lenders so you can make an informed decision regarding your home loan.

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What you need to qualify for a jumbo loan

Because it’s considered riskier and the loans aren’t backed by government entities, it can be harder to qualify for a jumbo mortgage loan, and it's virtually impossible if you have bad credit. Banks and credit unions often require borrowers to have a credit score higher than 700.

Lenders will also look closely at your debt-to-income ratio to make sure you can afford the mortgage payment. Some will want to see enough cash in the bank to cover six to 12 months of payments. Jumbo mortgage loans may require more documentation than conventional mortgages, such as tax returns, bank statements and investment account information.

Pros and cons of a jumbo loan

Like any mortgage product, jumbo loans have upsides and downsides. One of the advantages is the ability to borrow more than the limits set by Fannie Mae and Freddie Mac, which can make purchasing an expensive home possible.

Another pro is keeping more of your cash available by borrowing a higher amount while rates are still low. As long as you can make the monthly payment, you can keep your cash reserves for other investments.

And jumbo loans are flexible, with fixed- and adjustable-rates and a variety of terms. This can help you create a mortgage payment that fits your budget. Check out Credible’s online mortgage calculator to determine potential monthly payments.

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The downsides, however, are that you’ll need a strong credit score to qualify. If your FICO number is less than 680 or 700, you may not be approved. You'll also need to demonstrate a high annual income as well as significant financial assets and a low DTI.

Jumbo loan rates have higher interest than conforming loans. And since lenders often want to see proof of future payments, you will also need to demonstrate strong cash reserves. Lenders often require a larger down payment than conventional mortgages.

While low down payments are fairly common on conforming loans, jumbo loans are more likely to require a down payment of at least 20%, though some lenders may go as low as 10%.

Before you take on any debt—especially one of this size—make sure you understand your options and the terms. While real estate can be a good investment, you want to surround yourself with professionals who will help you make smart decisions. If you have questions, you can visit Credible to get in touch with experienced loan officers who can provide answers about mortgages—large and small.

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