If you’ve fallen in love with a particularly pricy property, then your real estate agent may have mentioned that you might need to secure a jumbo loan in order to call it home. What are jumbo loans? The name offers a pretty sizable clue, but there is a bit of jargon involved in the definition. You may find that you need to polish up your mortgage vocabulary to have a clear understanding. But don’t let that discourage you – it’s actually pretty simple.
What Are Jumbo Loans?
If you’ve guessed that jumbo loans are large home loans, then you’re on the right path. However, to really define a jumbo loan, you will first have to define a conforming loan. Then, you will be ready to answer the question: What are jumbo loans? It may also be helpful to explore the requirements that you’re likely to face if you choose to apply for a jumbo loan.
Conventional, Conforming, and Jumbo
Fannie Mae and Freddie Mac are entities that buy home loans from lenders, providing them with a ready source of fresh cash. However, they won’t buy just any loan. One of the rules that determine which loans they’ll buy involves the amount of the loan. To be eligible, the loan amount cannot exceed the conforming loan limits that are set annually by the Federal Housing Finance Agency. What does that mean for jumbo loans? The Ascent explains it this way:
- Conventional loans are home loans without any financial backing from the federal government.
- Government-backed loans are home loans where government backing offsets some of the risk for the lender. Popular examples include VA loans and FHA loans.
- Conforming loans are home loans that are for amounts that do not exceed the conforming loan limits set by the FHFA. These loans can be either conventional loans or government-backed loans.
- Jumbo loans are home loans that exceed the conforming loan limits set by the FHFA. They tend to be conventional loans, but it is possible to find government-backed jumbo loans.
Conforming Loan Limits for 2021
Clearly, you’ll need to know what the conforming loan limits are to decide whether you’ll need a jumbo loan. What are the conforming loan limits for 2021? As Business Insider reports, the limit is $548,250 in most areas of the U.S. However, it varies depending on your location. In high-cost places like Hawaii, Alaska, Guam, and the U.S. Virgin Islands, you can borrow up to $822,375 without exceeding the conforming loan limit.
Requirements for a Jumbo Loan
Jumbo loans involve more risk for lenders. As Experian indicates, that means borrowers can expect to face stricter requirements:
- Higher Interest Rates: Expect to see an interest rate one or two percentage points higher for a jumbo loan than a conforming loan to offset the increased risk.
- Bigger Down Payments: It’s possible to secure a conforming loan with a 3-percent down payment. However, lenders tend to demand down payments of 20 to 30 percent for a jumbo loan.
- Lower Debt-to-Income (DTI) Ratios: Divide your monthly debt payments by your gross monthly income to determine your DTI. For a conforming loan, a DTI as high as 50 percent may be accepted. For a jumbo loan, you’ll need to keep it at or below 36 percent.
- More Assets: Lenders prefer to see an extra-thick financial cushion for borrowers seeking jumbo loans.
- More Appraisals: In some cases, lenders may require a second appraisal to confirm the property’s market value.
- Additional Closing Costs: The verification process for jumbo loans is more extensive and costly, and that’s generally reflected in higher closing costs.
When you want help navigating the home financing process, turn to the loan experts at PrimeLending Kansas City. Whatever your housing goals are, we’ll offer personal attention and straightforward guidance as you work to reach them. Contact us today to learn more about our services and how they can benefit you.