Looking to buy a home? If you're wanting to move into a high-value property or an area where the cost of living is expensive, you might need to consider a jumbo mortgage.
A jumbo loan isn't your typical home loan, in terms of how much you can borrow or what's required to qualify. With a jumbo mortgage, you're borrowing more money for a home than you typically would with another type of home loan.
Here's what you need to know about how these loans work and when you might consider one for your home purchase.
Read more: Try savings buckets in an Ally Bank Savings Account to build up your down payment.
What is a jumbo loan?
A jumbo loan is a nonconforming mortgage that exceeds the loan limits set by Fannie Mae and Freddie Mac, which are government-sponsored enterprises regulated by the Federal Housing Finance Agency (FHFA). The maximum conforming loan amount varies based on where you live. Before you apply for a mortgage, be sure to look at the current jumbo loan limits for the area where you want to buy your new home.
With a jumbo mortgage, you're borrowing more money for a home than you typically would with another home loan.
Jumbo vs. conventional loans
Conventional mortgages are likely what first come to mind when you think about types of mortgages. A conventional loan is any mortgage loan that is not insured or backed by the government (such as under Federal Housing Administration, Department of Veterans Affairs or Department of Agriculture loan programs). Some conventional loans you may have heard of include fixed-rate mortgages and adjustable-rate mortgages.
A conventional loan can be a conforming or nonconforming loan. Those terms are a way of referring to the loan limits and what you can borrow with a conventional loan. This means, technically, a jumbo loan is a conventional, nonconforming loan.
Requirements to qualify for a jumbo loan
Jumbo loans are riskier for lenders than conforming loans, so the requirements to qualify are stricter. Eligibility will vary depending on the lender, but in general you can boost your odds of getting approved for a jumbo loan by having:
A minimum credit score of at least 680
A low debt-to-income ratio
Cash reserves to cover six to 12 months of mortgage payments
A sizable down payment (many lenders require a down payment of at least 20%.)
How much money do I need to get a jumbo loan?
Beyond your cash reserves and down payment, you'll want to have money on hand to cover the closing costs, which tend to be higher with jumbo loans than conforming loans.
Saving for a down payment for a jumbo mortgage can feel daunting, but with a strong savings plan and a savings account with tools to help you save more, you can take the necessary steps to get there.
Jumbo loan rates
Jumbo mortgage rates really aren't that different from conforming loan rates — both follow the 10-year Treasury yield as a benchmark for setting rates. It may even be possible to land a lower rate, depending on the lender and how qualified you are for a loan.
Why should you consider a jumbo loan?
Simply put, the best reason to consider a jumbo mortgage is that it can help you buy a more expensive home when other mortgage loans fall short.
If you stick with a conforming loan, you might have to resort to combining multiple mortgages to make a home purchase. Or, you may have to dig deeper into your liquid savings or investments to make up the difference between the purchase price and the loan limit. Jumbo loans eliminate those obstacles, giving you more flexibility in homebuying.
