Jumbo loans are more accessible than ever. According to the Mortgage Bankers Association, jumbo loan availability hit a record high in November, meaning it’s now easier for homebuyers to qualify for these larger-sized loans.
Does that mean you should consider one for your home purchase? If so, what does it mean for your wallet? Let’s dive into jumbo loans and when to use them.
What Is a Jumbo Loan?
Jumbo loans are mortgages that go beyond that conforming loan limit, which is $510,400 for 2020 (in most counties) as dictated by the Federal Housing Finance Agency (FHFA). In some higher-cost housing markets, the threshold may be higher. To see the conforming loan limits for your county, check out Fannie Mae’s guide.
There are also VA jumbo loans, which are available to veterans and military members only. These are only for use on primary residences and require a down payment (unlike traditional VA loans).
When Should You Use a Jumbo Loan?
You can use jumbo loans to buy a primary residence, second home, vacation property, or investment property, but keep in mind: qualifying for these loans is harder than other mortgage options.
Because these loans go beyond the conforming limit, they can’t be purchased by Fannie Mae or Freddie Mac, and lenders can incur a loss if a borrower defaults on their loan. For these reasons, they hold applicants to much stricter standards than on other loan types.
You’ll likely need:
- At least a 700 credit score (maybe 720)
- A large down payment (20 to 30% in most cases)
- A low debt-to-income ratio
In general, a jumbo loan is a good choice if you’re buying a home in a high-cost market (or you’re just buying a more expensive home) and you have good credit and are on solid financial footing.
Keep in mind that a jumbo loan will mean a jumbo-sized monthly payment, too, so make sure you stay within your means. You generally want your housing costs to clock in at 30% or less than your monthly income. Any more than that, and you could have problems staying afloat — especially if an emergency crops up or you have a sudden change in income.
The Bottom Line
Jumbo loans are a nice option to have, but they’re not right for every homebuyer. Do you need help determining what type of mortgage loan is best for your home buying goals? Then reach out to Embrace Home Loans today. We’re here to help.