A jumbo loan is a mortgage that exceeds the conforming loan limit set by Fannie Mae and Freddie Mac. Some key points to consider about jumbo loans include:
Higher credit score and down payment requirements: Jumbo loans typically have higher credit score and down payment requirements than conventional loans. Borrowers should have a credit score of at least 680 and be able to provide a down payment of at least 10% of the purchase price.
Used to finance high-priced properties: Jumbo loans are typically used to finance properties that are too expensive for most conventional loans. In 2023, the conforming loan limit is $726,200. Is what this means is if you need to finance $726,201+ in your loan amount, you will be on a jumbo loan. It varies by lending institution, but some Jumbo loans can go all the way up to $5,000,000!
Fixed or adjustable interest rate options: Jumbo loans may be available with either a fixed or adjustable interest rate. A fixed-rate mortgage has an interest rate that remains the same for the entire loan term, while an adjustable-rate mortgage (ARM) has an initial fixed-rate period followed by periodic adjustments to the interest rate.
Available to both homeowners and homebuyers: Jumbo loans are available to both homeowners who want to borrow a large amount of money for a home improvement project or to pay off other debts, and homebuyers who are looking to purchase a high-priced property.
May require private mortgage insurance: Borrowers who make a down payment of less than 20% may be required to pay private mortgage insurance (PMI) with a jumbo loan. PMI is an insurance policy that protects the lender in the event that the borrower defaults on the mortgage. In most scenarios, jumbo loans do not have mortgage insurance, however, this can vary by lender and investor to their exact specifications and risk involved in the transaction.
Overall, jumbo loans are a financing option for borrowers who are looking to buy an expensive home and have a strong credit profile and a down payment of at least 10%. They may not be suitable for borrowers with lower credit scores or who have limited funds for a down payment, but, they are a great lending program for those in larger metro areas where the average home price may be higher, or, for waterfront properties, ski resorts, and homes close to major life attractions.