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Traditional mortgages aren’t for everyone. 

If you’re looking to purchase an expensive home or in an expensive area, then you’ll have to look at other options. That’s where jumbo loans come in.

These types of loans are intended for those looking to buy homes that require a loan larger than what Fannie Mae and Freddie Mac can offer. In general, jumbo loans require larger down payments, have higher interest rates, and have more hoops to jump through. 

Here’s what to consider before applying for a jumbo mortgage.

When Is a Loan Considered a Jumbo Loan?

The Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, commonly known as Fannie Mae and Freddie Mac, are government-sponsored enterprises (GSEs). Each institution buys mortgages from banks, packages them into mortgage-backed securities, and sells them. They then use the money to subsidize lower mortgage rates for working-class and middle-class homeowners. Loans backed by GSEs are intended to make homeownership more affordable.

Fannie Mae and Freddie Mac have limits for how big a home loan can be, and those conforming limits are updated annually to accommodate rising prices in the real estate market. Loans above those limits are considered nonconforming, or “jumbo,” and cannot be government-backed. Many lenders, such as credit unions, cannot accommodate jumbo loans. So you’ll have to look for banks and online lenders that do. If you’re considering a jumbo loan, a mortgage broker may be able to help as well, since they have access to many options.

2021 jumbo loan limits

Jumbo loan limits vary by county, but they’re typically higher in metropolitan areas with a high cost of living  — as well as in states and territories outside the continental United States. “A $548,250 mortgage in San Francisco doesn’t get much. That’s why Fannie Mae recognizes the loan limit to be higher,” says Todd Johnson, SVP, Midwest division sales manager at Wells Fargo.

On November 24, 2020, Fannie Mae and Freddie Mac announced higher loan limits for 2021. Here are the conforming loan limits for single-family homes this year:

  • $548,250 for most of the U.S.
  • $822,375 for high-cost areas, such as New York City, Los Angeles, Washington, D.C., and Hawaii

Any loan larger than the limit in your area will be considered a jumbo loan. You can find the conforming loan limits in your area using this map from the Federal Housing Finance Agency.

Why Do Conforming Loans Have Limits?

Loans backed by Fannie Mae and Freddie Mac are intended to help working-class and middle-income families purchase homes they may otherwise not be able to afford. Jumbo loans are considered jumbo because they exceed the conforming loan limits and aren’t government-backed.

How Are Jumbo Loans Different from Conventional Mortgages?

Conforming loan limits matter because jumbo mortgages are generally more difficult to get. Your lender may require additional cash or application materials from you, for example. Here are the ways your mortgage search will be different if you’re getting a jumbo loan.

Your lender may not offer jumbo loans

Most mortgages fall within the conforming loan limits, so some lenders don’t offer jumbo loans because of the increased risk and small pool of borrowers who want them. Jumbo loans are considered riskier because the bank is lending a large amount of money and borrowers tend to take longer to pay off. Ilyce Glink, CEO of Best Money Moves and author of 100 Questions Every First-Time Home Buyer Should Ask, suggests using a mortgage broker to find jumbo loan options, as brokers have relationships to many types of lenders.

You may need a higher credit score

Some lenders may require a higher credit score for jumbo loans than loans conforming to the Fannie Mae and Freddie Mac loan limits. For purchases of single-family homes within conforming loan limits, both Fannie Mae and Freddie Mac require minimum credit scores between 620 and 700, depending on whether the interest rate is adjustable or fixed and what your loan-to-value and debt-to-income ratios (DTIs) are. To get approved for a jumbo loan (or to secure a lower interest rate or lower down payment), you may need a credit score on the higher end of that range, though requirements among lenders will vary.

The interest rate will likely be higher

Interest rates on jumbo loans are at historic lows because of the rate cuts from the Federal Reserve in 2020. But there’s one thing to keep in mind: they still tend to be higher — between 0.25% and 0.50% higher — than those from conventional mortgages, according to the Wall Street Journal. The interest rate you receive will depend on a number of factors, including credit, DTI, and down payment, but you can probably expect to pay a premium for taking out a jumbo loan. 

You may be required to make a bigger down payment or prove you have cash on hand

Lenders require assurance that you have a solid financial record, and will make your monthly payments on time. This can come in the form of a larger-than-usual down payment (between 15% and 30%) or proof of reserve funds (i.e., savings or valuable items). If you don’t have either, you may have a hard time getting approved for a jumbo loan.

You may have to undergo a second appraisal

To prove your home is actually worth the amount of money you’re borrowing, lenders may require a second appraisal of the property before closing. A home appraisal is a formal evaluation of the home’s market value by looking at the property size, exterior, and interior condition — and any home improvements and renovations.

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