A jumbo loan is exactly what it sounds like. It’s a loan that exceeds conventional loan (ex: 30-Year and 15-Year fixed rate mortgages) limits determined by the Federal Housing Finance Agency (the FHFA). This makes them a nonconforming loan.
What Does a Typical Jumbo Loan Look Like?
A jumbo loan can look different depending on where you are trying to purchase a home. The FHFA can change the limit annually and they can even change is by state and even by county. Just this year in 2018, the FHFA recently increased the limit because of the rising home prices. For most of the U.S., the limit has been increased to $453,100 for a single-family home. In other areas where real estate tends to be more expensive, the limit has been increased to $679,650 for a single-family home. Areas include parts of California, New York, Washington, D.C., Hawaii, etc.
What Makes a Jumbo Loan Different?
Well, because of the loan amount, jumbo loans have stricter qualifiers. In order to qualify for a jumbo loan, you need to have great credit. Since the loan amount exceeds the limit for conforming loans, this categorizes jumbo loans as nonconforming. Because jumbo loans are nonconforming loans, this means that they are not backed or guaranteed by the government. This means that if the homeowner defaults on the loan and can no longer pay their mortgage, no one assumes responsibility for the remaining debt but the lender.
Because of this potentially high risk coupled with the high loan amount, great credit is pretty much mandatory. In addition to great credit, a much larger down payment is also required for a jumbo loan. There also might be an additional appraisal. Lenders may want a second opinion just to make sure that the home is really worth the amount borrowing. And because of the larger loan amount, there may be extra steps in the approval process (such as the 2nd appraisal), which makes a jumbo loan’s closing costs more expensive.
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Who is a Good Candidate for a Jumbo Loan?
Typically, people who have high-earning incomes are great candidates for a jumbo loan because they can afford them. People who also have excellent credit scores and extensive credit histories are also great candidates. If you don’t have millions of dollars in cash lying around, you can still get approved for a jumbo loan. If you’ve been regularly contributing to your retirement and investment accounts, those are also representative of your assets.
While jumbo loans are necessary, depending on the area where you want to purchase property, it all comes down to whether you can afford to keep up with the monthly payments.