What the Heck is a Jumbo Loan?December 16, 2020 by DRG
You may have heard the term, but many still ask “What the heck is a Jumbo Loan?” So, we sat down with mortgage expert, JJ Ellingson, to get break down what Jumbo Loan the new loan limited associated with Jumbo loans, and who may need one.
To start, A jumbo loan—another name for a jumbo mortgage—is a type of financing that exceeds the limits set by the Federal Housing Finance Agency. These loans are offered to those looking to purchase a condo, lofts or home in a higher price range. And because these loans exceed the typical limit, they require you to have a higher credit score and greater cash reserves among other things.
When is a loan considered ‘jumbo’?
The Federal Housing Finance Agency, which oversees Fannie and Freddie, has announced conforming loan limits for 2021, with most areas of the United States seeing an increase from 2020 limits due to rising home prices. This means the limit for how large a loan can be before it’s considered “jumbo” moved higher, which could be a good thing if you’re looking to finance a home priced near the cutoff point.
For 2021, the limits for non-jumbo loans are:
- $548,250 for a single-family home in most areas of the country
- $822,375 for high-cost areas, like Washington, D.C., and some parts of California, where single-family home prices tend to be above average
“The maximum limits set by the Housing and Economic Recovery Act of 2008, as well as the rules for adjusting the limit, were meant to ensure that loans enabled by Fannie Mae or Freddie Mac would be widely available”, says Andrew Leventis, deputy chief economist at the FHFA.
Jumbo loan values exceed limits set by the Federal Housing Finance Agency, making them nonconforming loans.
Jumbo loan values exceed the limits set by the Federal Housing Finance Agency, making them nonconforming loans. Lenders view nonconforming loans as riskier because Fannie and Freddie won’t guarantee them. If a borrower stops making payments and the jumbo loan defaults, lenders know they’ll be on the hook for a big chunk of change.
As for limits on jumbo loans, that’s up to the lender. JJ Ellingson and LeaderOne will finance a loan above $2 million dollars depending on borrower qualifications and money down. Once you’re in the realm of nonconforming mortgages, you can borrow as much as your lender will agree to loan.
Why loan limits matter?
If the amount you want to borrow goes beyond the conforming loan limits and you need to get a jumbo loan, your lender may require:
- A stronger credit score. The minimum for a jumbo loan is typically 680, but some lenders may require an even higher credit score
- More cash in the bank. Knowing you have cash reserves, and not too much debt, makes lenders more likely to approve your jumbo loan
- A larger down payment. Requirements vary by lender and depend on your financial history
- An extra appraisal. Some lenders may require a second opinion on the home’s value to be sure it’s worth the amount you’re borrowing
- Additional fees. Since you’re borrowing a larger amount, there may be some extra steps in the loan process, leading to higher closing costs
Historically, interest rates on jumbo loans have been higher than conforming loans due to higher risk and sometimes as much as 1% higher. In today’s low rate environment, LeaderOne has jumbo rates within a quarter percent of a conforming loan depending on credit and loan to value. For more information, contact JJ Ellingson today!