Learn why jumbo loans may be the best home loan option in higher-priced real estate markets.
When you start exploring types of home mortgage loans, you’ll probably hear the term “jumbo loan”. If you do, it’s because you live in a high-end real estate market or you’re looking at properties that are far more expensive than average (probably both).
If you’re looking to borrow over $500,000 for a new home it’s worth your time to research what a jumbo loan is and whether or not you qualify.
What is a Loan Jumbo?
A loan is “jumbo” if it exceeds what is known as the conforming loan limit. This limit is set by Fannie Mae and is based on the median home price nationwide. In 2020, a jumbo loan mortgage is $510,400 (or more), and is up from the $484,350 minimum in 2019.
For high-cost real estate areas (i.e. NYC, San Francisco) the conforming loan limit can be up to 150% of the national limit.
Each year, a new conforming loan limit is published by Fannie Mae. To see the loan rates for your area visit the Fannie Mae website.
How Are Jumbo Loans Different?
If you’re considering a property that has a purchase price that will require a jumbo loan, be sure to let your lender know, so they can help you run the numbers and explore the best options.
Jumbo loans are available at a fixed or adjustable rate, but they’re usually harder to qualify for and come with higher interest rates. The cost of jumbo loans can be as much as 1.5% higher vs. loans that fall within the conforming limit. This means that you may pay more in interest on a jumbo loan vs. conforming loan.
Qualifying for a jumbo loan usually requires higher credit score too. Other qualifications include a lower debt-to-income ratio, and sometimes a larger down payment than a conforming loan. These differences vary by lender, so ask yours to provide you with their specific jumbo loan costs and requirements.
What Are Your Options?
In some high-priced markets, even smaller homes require a loan above the conforming loan limit. This can be difficult in areas like New York City and San Francisco where the average single-family home price is well above the national average.
A jumbo loan may provide an opportunity to buy into these high-priced real estate markets, but here’s a two factors that will get you a better mortgage rate.
1. Increase your down payment
Increasing your down payment is the simplest option if you have the funds to do it. By putting more cash toward the down payment, you borrow less money, and therefore decrease the risk for the lender.
A larger down payment is even more advantageous for jumbo loans vs. other home loan options, especially if your loan is slightly above the conforming loan limit.
Read our guide on how to shop for a home mortgage.
2. Consider getting two home loans
This option is a bit more complicated and involves applying for, and being approved for two mortgages at the same time. Each will have different terms, and possibly a different lender (whichever one offers you the best rates).
The objective is to have two loans at home closing that are both under the conforming limit and therefore give you a lower interest rate. However, having two home loans increases your risk since you’re technically on the hook to pay both loans each month.
Also, the second mortgage may carry a higher interest rate vs. the first mortgage. Before shopping around for a second mortgage it’s best to consult with your lender and calculate the costs, and interest rate savings for both loans.
FYI: your second loan may have a different term length and interest rate.
If you’re planning to buy a home in an area where higher-priced homes are the norm, you may want to consider a jumbo loan. Your lending advisor will know if you qualify for it, and if so, what you should expect in terms of interest rates. Together you can work through different scenarios to see if it makes sense to save-up for a larger down payment.
Whichever option you choose, you should be confident that you can make all your loan payments in full, and on time every month. Having a good lending advisor, and understanding the full cost and terms of each loan option is a huge benefit when negotiating and shopping for a home mortgage.