If you’re in the market for a home with a hefty price tag — we’re talking a half-million dollars or more — it would be a good idea to study up on what’s known in the mortgage industry as a non-conforming jumbo loan.
How a jumbo loan works. Homebuyers seeking a jumbo loan need to borrow more money than is typically permitted under federal guidelines. Without federal backing for these loans, private lenders set higher standards for jumbos, given the greater risk they incur. That means the homebuyer will face higher fees, stricter standards and quite possible a higher interest rate.
In most counties nationwide, buyers will need a jumbo loan if they borrow more than $453,100. In more expensive housing markets, such as the West Coast, a jumbo loan is necessary for a loan exceeding $679,650.
The jumbo loan interest rate can be fixed or variable. Although some lenders will allow as little as 10 percent down, jumbo loan buyers should more likely expect a requirement for 20 percent down.
Credit profiles will be scrutinized more carefully with most lenders looking for credit scores to be above 700. A jumbo loan can be used for a primary residence, an investment property or a second home.
Market conditions. Rising home prices across the country caused the federal loan limit to rise in 2018 with some markets qualifying for the boost to $679,650. In such markets, borrowers were pushed into jumbo loan territory not for considering the purchase of mansions, but for regular middle-class homes.
As a result, some lenders have relaxed some of the standards for jumbo loans described above, although credit rating and documentation standards remain high.