Have you ever wondered how much is too much when it comes to borrowing money? What would be the maximum amount that a bank would be willing to lend you, even if you had more than enough income to pay it back?
It turns out there is a limit for ordinary conventional mortgage loans: $647,000. Conventional can sometimes be paired with another term: conforming. Fannie Mae and Freddie Mac, two of the largest purchasers of single-family mortgages, have restrictions on the mortgages they can buy. One of those restrictions is that limit of $647,000. If a loan meets all of Fannie and Freddie’s requirements, it is known as conforming.
Banks can lend more than the limit, or lend outside of the requirements, but they won’t be able to sell the loan to Fannie Mae and Freddie Mac. The mortgage is then called a jumbo mortgage.
If you're thinking about buying a home in a high-priced market, you may need a jumbo mortgage. Here's what you need to know about these loans.
What is a jumbo mortgage?
A jumbo mortgage is a type of mortgage loan that exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA). This means that jumbo mortgages are not backed by the FHFA and can’t be bought by Fannie Mae or Freddie Mac, the two government-sponsored enterprises that purchase conforming loans from lenders. This means that non-conforming mortgages pose a greater risk for banks and credit unions that lend make the loans.
Jumbo mortgages are available from some lenders and have different underwriting standards than conforming loans. Jumbo loan limits vary by location. In most counties, the limit for a single-family home is $647,200. Some “high-cost areas”, such as New York City or San Francisco, have a higher limit of $970,800.
The FHFA has defined “high-cost areas” as counties where 115% of the local median home value exceeds the baseline limit. In this case, a county’s median home value would have to be a minimum of $744,280 to qualify for a higher limit. Currently, there are no counties in Texas that are designated high-cost areas.
(Sorry, Austinites— the median home cost in Austin has risen significantly, but is still shy of the high-cost area threshold at $640,00.)
Types of Jumbo Mortgages
Just like conforming home loans, jumbo mortgages can be either fixed rate or adjustable rate.
- Fixed-rate jumbo mortgages: Borrowers who take out a fixed-rate mortgage will enjoy the same interest rate for the entire life of the loan. The interest rate you’re offered when you apply for the loan will be the interest rate you have when you make your last payment. Fixed rate loans are typically found in 15-year or 30-year terms.
- Adjustable-rate jumbo mortgages: Adjustable-rate mortgages have an interest rate that is subject to change. Typically, ARMs have an introductory period— typically anywhere between three to ten years— where the interest rate is fixed. After that, the interest rate will change periodically as the economy fluctuates.
There’s a time and place for each type of mortgage. For instance, if you plan on selling your home in a few years, an adjustable-rate mortgage may make more sense for your situation.
How Jumbo Mortgages Are Different
The high dollar amount isn’t the only thing that sets jumbo mortgages apart from conforming loans. They can also have some major differences when it comes to down payments, interest rates, qualification requirements, and property types.
If you’re purchasing a luxury home with a jumbo mortgage, be prepared to put down a sizable down payment. Oftentimes, lenders will require you to put down anywhere between 20% and 30% of the home’s value.
These days, jumbo loan interest rates are closely aligned with those of conventional loan rates. Still, it’s not uncommon to see jumbo rates be slightly higher than those of smaller loans.
When borrowing such a large amount, every point on your interest rate counts— one of the reasons why it’s so important to shop around for the best lender.
Because banks assume a bigger risk with these large loans, you’ll find that they have stricter qualification requirements.
- High credit score requirements: To qualify for a traditional conforming loan, borrowers usually need to have a credit score of 620 or higher. However, to qualify for a jumbo loan, you can expect to need a minimum of 700.
- Proof of income and asset documentation: Lenders may want to see further proof of income or assets to verify that you have the funds to make your monthly payments.
- Lower debt-to-income ratio: Borrowers with too much debt are risky in the eyes of a lender. This is even more true when the borrower is taking on hundreds of thousands— or millions— in mortgage debt. If you’re taking out a large loan, lenders will probably look at your other debts with more scrutiny.
One added benefit that jumbo loans offer is that they don’t have to be used for primary residences. Because they fall outside of the government’s regulations, they can be used for things like vacation homes or investment properties.
Learn If a Jumbo Loan Is Right for You
Jumbo mortgages can help you purchase the luxury home of your dreams. If you plan on borrowing more than $647,200 to purchase a home in Central Texas, this type of home loan will be one of your best options. If you meet the stricter qualification requirements, a jumbo loan can give you up to $9.5 million to put towards your new home.
Want to explore jumbo loans and other options? Talk to a loan expert at Amplify Credit Union to find the best product for your goals and financial situation.