A jumbo loan, or a jumbo mortgage, is a home loan that surpasses the limits of a conforming loan. These limits are set by the Federal National Mortgage Association (FNMA), or more commonly known as Fannie Mae, and the Federal Home Loan Mortgage Corporation (FHLMC), also better known as Freddie Mac, which are both government-backed enterprises. Because a jumbo loan is not sponsored by the government it is ineligible to be purchased, guaranteed or securitized by Fannie Mae or Freddie Mac.
The jumbo loan is designed to finance luxury properties and higher value homes. A jumbo loan’s limits can vary between states and between counties, but for a majority of the United States in 2017 it reaches its peak at $424,100 (based on one-unit homes). The Federal Housing Finance Agency (FHFA) site will have the information specific to your area.
The interest rate on one of these loans can be much higher than a conforming loan, so do not make the decision of a jumbo loan lightly as it also comes with underwriting requirements and tax implications in addition to its higher interest rate. A jumbo loan does, however, offer a few benefits that conforming loans do not. With an approved jumbo loan there is flexible income calculations, less than 20 percent down with no mortgage insurance and a higher debt-to- income ratio.
If you currently exceed the limits of a conforming loan, then a jumbo loan is within the realm of possibilities, but do analyze your own financial situation to determine if a jumbo loan is right for you. And should you decide that it isn’t the right fit, as a borrower you will need to consider one of two options: First, you may qualify yourself for a conforming loan by reducing the loan size to land yourself below the conforming loan limits, which can be done through a larger downpayment. Another way of avoiding a jumbo loan would be to utilize a secondary financing source to qualify for a conforming loan.