In the United States, most residential property mortgage needs can be met within the guidelines set up by government-sponsored financing entities designed to encourage homeownership through the Federal Housing Finance Agency (FHFA). You’ll need a jumbo loan if you’re looking for a home that exceeds the set limits and are financing through government-sponsored lenders.
Limits for Jumbo Loans
Home loans acquired through government-sponsored lenders like Fannie Mae and Freddie Mac are limited to specific amounts. In 2022, the limit for most areas is $647,200 unless you live in an area that meets the criteria for an adjustment. In that case, the limit goes up to $970,800, depending on the area. Loans that conform to these rigid standards are called “conforming loans.” It’s an important concept because if many similar mortgages are created with nearly identical guidelines, they can more easily be bundled together to create “pools” of mortgages. These pools can then be securitized to create mortgage-backed securities, which are designed to provide greater liquidity within the mortgage market. But if the property is too expensive to meet those guidelines, they may still be attractive loans for lending institutions to make. They just don’t “conform” to the limits of government programs and must be securitized privately: usually at slightly higher interest rates. These bigger-than-standard mortgage loans are called “jumbo loans.” FHFA sets dollar limits on loans for Fannie Mae (FNMA) and Freddie Mac (FHLMC). These government-sponsored entities handle a significant share of mortgage loans in the U.S., and they keep the money flowing by selling mortgages to investors. As a result, it’s easiest to borrow when your loan fits their guidelines.
Qualifying for a Jumbo Loan
Although jumbo loans allow for significant-sized loans, qualifying for one can be challenging. As the dollar amounts grow, lenders take on greater risks; they’re also more careful about issuing approvals. Jumbo loans typically require:
A significant down payment: 20% or more is best, but you might be able to borrow with lessHigh credit scores: You’ll need a lack of negative items in your credit history—a FICO score of 700 or higher is idealSubstantial reserve assets: You’ll likely need enough to cover six months of payments at a minimumSufficient income: You’ll be required to show you can comfortably support monthly payments—a 43% debt-to-income ratio is probably the lowest you can have.
Every situation is unique, especially regarding jumbo loans. It helps to talk to a lender and find out their criteria to determine whether you might be approved. In some cases, you can qualify even if one of the factors mentioned isn’t perfect—strength in one area can make up for weakness in another. For example, if you have a blemish in your credit reports, a sizable down payment might help you qualify.
Do You Need a Jumbo Loan?
Jumbo loans allow you to buy luxury homes, unique properties, and “normal” houses in expensive areas. But just because you can get a big loan doesn’t mean you should. Larger loans mean substantial interest charges, and it’s critical to understand how much you’re paying for a property after you account for interest costs. In some cases, it may be best to make a bigger down payment (borrowing less) or buy a less-expensive property somewhere else if you can.
Alternatives to Jumbo Loans
If you’re looking into an expensive home, jumbo loans aren’t your only option. If you’re having trouble qualifying for a jumbo mortgage, it’s worth investigating programs from federal and local governments as well as nonprofit organizations to see if you qualify for assistance.
FHA Loans
Relatively easy to qualify for, FHA loans allow for a down payment as low as 3.5%. They have the same loan limits as conforming loans, but FHA loans are sensitive to the county you’re buying in.
VA Loans
These loans allow service members and their families to borrow for a home with no down payment. That approach has pros and cons: You don’t need significant cash savings to buy, but having zero equity is risky, and the more you borrow, the more interest you pay. Again, the limits are the same as other FHFA loans.
Grants and Down Payment Assistance
Down payment assistance can also help to reduce the amount you borrow. These funds come from various sources, and they require some research and legwork on your part—different programs target specific borrowers. Some ways to find assistance include:
The U.S. Department of Housing and Urban Development (HUD) maintains a directory of homebuyer programs. Local nonprofit organizations may know of first-time homebuyer loans and other resources available.
