First Time Home Buyer? Learn How Jumbo Loans Work

Shopping for a home to buy can be exciting and fun. Nothing can diminish the excitement quicker than finding your dream home costs more than you’d hoped. And you discover you may not be able to get the loan from your lender.

Ever consider a Jumbo loan? Jumbo loans are an ideal option today for homebuyers who find luxury homes that fall out of the guidelines that conventional lenders must follow.

Overview

This home loan program is used when the purchase price exceeds the amount set by Freddie Mac and Fannie Mae. As of 2018, the conforming limits for mortgage loans is $453,100. This means that if the price is higher than $453,100 the loan must be classified as a Jumbo loan. Because homes are more expensive in certain areas, the conforming limits are different in these areas.

In some areas, the limit is $679,650. Areas like Alaska, Hawaii, Guam and the U.S. Virgin Islands have higher limits. The highest conforming loan limit is $721,050. In some of the high-cost areas, a home buyer can get a mortgage loan for more than $700,000 and still pay the FHA’s minimum loan down payment of 3.5%.

Jumbo Loans vs. Conforming Loans

When banks use the term “conforming loans”, what they are referring to are traditional mortgage loans given by banks and lending institutions. They’re called conforming because they conform to government guidelines regarding things like loan size, debt-to-income ratio and credit scores. Traditional mortgage loans are often referred to as conforming because they conform to government guidelines regarding things like credit, debts and loan size.

About the only similarity between conforming loans and this program is that they’re both used to purchase homes. Here are the differences between the two.

• Jumbo loans are from the same bank that originally provides the money to the homeowner. Conforming loans come from a lender but are often later sold on the open market to government-backed lenders like Fannie Mae and Freddie Mac.
• To be considered Jumbo loans, they must be for a certain dollar amount.
• They are not government-backed, and usually have higher interest rates than conforming mortgage loans.
• Conforming loans are offered at many more banks and lending institutions. The lack of availability of Jumbo loans makes them more competitive, often resulting in higher interest rates and stricter guidelines.
• Conforming loans typically require lower down payments.
• Conforming loans are often offered with credit scores in the 600s, while Jumbo loan customers should have credit scores of at least 700.
• Because the dollar amounts are higher, there is more documentation involved and higher closing costs than with conforming loans.
• Jumbo loan customers may have to have cash or savings equal to several months of mortgage payments.
• Applicants must adhere to stricter guidelines, such as having two home appraisals.

Advantages of Jumbo Loans

Despite there being some disadvantages to, there are many times when they’re the right choice. There are pros and cons to all loan types. Here are some advantages:

• They offer tax breaks to borrowers, who can claim interest payments on loans up to $1 million.
• The interest rates are lower than in recent years.
• Private mortgage insurance is not required on this mortgage program.
• Homeowners can buy luxury homes with Jumbo loan that they might not otherwise be able to afford.
• Customers with higher credit scores can get lower interest rates with Jumbo loans.