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As home prices continue to rise, a new loan type is becoming more popular: jumbo loans. A jumbo loan—sometimes called a “jumbo mortgage” or “non-conforming loan”—is a type of mortgage financing that exceeds the loan limits set for most mortgages. If you’re planning to purchase a home around $726,200 or above, this type of loan may be a good fit. Here’s some additional information on how they work to help you decide.
1. What is a jumbo loan and what are its benefits?
Jumbo loans are mortgages that exceed loan limits set by two of the country’s largest mortgage backers, Fannie Mae and Freddie Mac, and their regulator, the Federal Housing Finance Agency (FHFA). Because these loans don’t conform to Fannie and Freddie’s standards, they’re also known as “non-conforming loans.” Although rules vary by lender, some basic benefits of jumbo loans include:
- The chance to borrow more than the conforming loan amount in a home’s county. Conforming loan limits are usually $726,200, but can go higher in some counties.
- The ability to borrow up to $2.5 million depending on property type and lender.
Additionally, eligible borrowers can use these loans to buy secondary properties, from rental to vacation homes.
2. What are some common jumbo loan requirements?
These can also vary by lender, but some general requirements include:
- A down payment of at least 20%.
- A credit score of at least 680.
3. Why is there increasing demand for them?
These loans have gained popularity over the past few years as home prices have increased. The National Association of REALTORS® (NAR) reported that 80% of markets showed double-digit home price appreciation with the national median home price rising 14.2% year over year. This increase has made bigger loan amounts a necessity in more expensive markets such as California and New York.
As of July 2021, inman.com reported that jumbo loans “accounted 12.4% of all purchase and refinance rate locks, up from 5.25% a year ago.” The continued home price appreciation is changing buyer’s budgets, resulting in an increased demand for larger loans.
4. Are interest rates higher on jumbo loans?
Typically, yes. Jumbo loan rates are usually higher than rates for conforming and conventional loans (loans that aren’t guaranteed or insured by the government). That’s because lenders are taking on more risk given the higher amounts. That said, it’s always best to check with a mortgage lender to see where rates stand. Jumbo loan rates have been lower than conforming loans’ at times.
5. Is this the right loan for me?
Choosing the best loan type often comes down to a few key questions. What is your budget? What type of home are you wanting to buy? And where? If you are looking to buy a larger home or are in a higher priced market, a jumbo loan might be right for you.
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