3 things to know about Jumbo loans

A jumbo loan is a completely different ball game than a conventional loan.

When buying a home, you will most likely need a mortgage. Since this is a large debt, it is important to understand how these home loans work.

One of the first things to know is that mortgages can broadly be divided into two categories: conforming loans and jumbo loans. Compliant loans meet secondary mortgage market purchase requirements by two government sponsored entities – Fannie Mae and Freddie Mac. The requirements are many, but the value of the loan is one of the most important.

If a loan exceeds the conforming loan limit, it is classified as a “jumbo loan”. The precise definition of this changes from year to year. But, as of 2021, loans over $ 548,250 are considered jumbo loans in most parts of the country.

If you’re buying an expensive home and need a jumbo mortgage, there are three things you should know before you start shopping for your mortgage.

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1. Your interest rate will likely be higher

Historically, jumbo loan rates have been higher than conventional mortgage rates.

This was not the case recently, however. For years, jumbo loans were viewed by investors as less risky because they had more stringent requirements and borrowers tended to be better qualified. As a result, jumbo loan rates were cheaper than conventional loan rates for much of the 2010s.

The pandemic, however, changed the mortgage market, pushing down compliant loan rates. Now, if you borrow a larger amount and need a jumbo loan, you can expect to pay a slightly higher interest rate than a qualified borrower would pay for a compliant loan.

2. You might need a larger down payment

Since lenders make larger loans and more expensive homes may take longer to sell for market value if foreclosed, lenders take on a greater risk with jumbo mortgages. This is especially true as jumbo loans cannot be resold to Fannie Mae and Freddie Mac either. Lenders might have to keep them on their books or try to package them for sale to other investors.

As a result, many mortgage lenders require a larger down payment for jumbo loans to ensure borrowers have more money at stake and homes have more equity in the event of foreclosure. While you strength Finding lenders that allow a 10% down payment, you are more likely to pay at least 20% and potentially up to 30% if you take a jumbo loan.

On the other hand, it is relatively easy to find lenders willing to provide conforming loans with down payments of 3% (and less) if you are a qualified borrower. See the following guides for more information:

3. Jumbo loans can be more difficult to obtain

Due to the additional risks of jumbo loans, mortgage lenders also want borrowers to get their personal finances in order and be highly skilled.

This means that they will be more stringent by requiring proof of:

If you can meet these requirements and have a larger down payment to make, you should have no trouble finding a lender offering an affordable jumbo loan. Just keep in mind that it will likely carry a slightly higher rate than a compliant loan. And it can be a bit more difficult to find the perfect lender, especially if you are borrowing to buy a more expensive home.

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