If you are in the market for a large home, a luxury home, or a home that is in a highly competitive market, you might find that the limitations set by Fannie Mae and Freddie Mac make it difficult for you to acquire the necessary funding. In these kinds of situations, there are typically three options: increase your down payment, find a lender that will offer you a second mortgage, or apply for a jumbo mortgage.
A jumbo loan (or jumbo mortgage) offers many of the same terms and qualification requirements as a conventional loan, but it is designed to finance borrowers beyond the limits set by the FHFA, or Federal Housing Finance Agency. This means that Fannie May or Freddie Mac cannot purchase or guarantee a jumbo loan, which increases the risk assumed by the lender
Although a jumbo mortgage can help you achieve your goals, there are some additional qualifications that buyers must meet in order to reduce the lender’s risk and receive the necessary loan. For example, credit requirements are far more rigorous, which means that you will need to prove exceptional creditworthiness and a very low debt-to-income ratio.
Furthermore, jumbo mortgages tend to come with highly unique underwriting requirements and tax implications that should be considered carefully before signing a contract. Interest rates may also be higher, but the higher your down payment and the better your credit score, the lower the interest rate will be.
As of 2020, the limits for conventional loans were $548,250 for single-family homes in most parts of the country and $822,375 for high-cost areas such as Washington, DC, parts of California, and other areas.
Where single-family homes tend to exceed the national average by a great deal. A jumbo mortgage is an option for properties that exceed these limits, such as exceptionally large homes and luxury homes.