When you set your sights on a pricey home — or an average home in a pricey area — a traditional mortgage may not be enough. A jumbo loan could be the answer, but you may need a higher credit score and bigger cash reserves, among other things, to qualify.
Do you need a jumbo loan? You may if the amount you want to borrow exceeds the latest conforming loan limits used by the government-sponsored enterprises Fannie Mae and Freddie Mac.
When is a loan considered ‘jumbo’?
The Federal Housing Finance Agency, which oversees Fannie and Freddie, has announced conforming loan limits for 2021, with most areas of the United States seeing an increase from 2020 limits due to rising home prices. This means the limit for how large a loan can be before it’s considered “jumbo” moved higher, which could be a good thing if you’re looking to finance a home priced near the cutoff point.
For 2021, the limits for non-jumbo loans are:
$548,250 for a single-family home in most areas of the country
$822,375 for high-cost areas, like Washington, D.C., and some parts of California, where single-family home prices tend to be above average
Loan limits may be even higher in places outside the contiguous United States, like Hawaii.
Find conforming loan limits in your area by using the tool below.
Why do conforming loans have limits?
The maximum limits set by the Housing and Economic Recovery Act of 2008, as well as the rules for adjusting the limit, were meant to ensure that loans enabled by Fannie Mae or Freddie Mac would be widely available, says Andrew Leventis, deputy chief economist at the FHFA.
“Jumbo loan values exceed limits set by the Federal Housing Finance Agency, making them nonconforming loans.”
Jumbo loan values exceed these limits, making them nonconforming loans. Lenders view nonconforming loans as riskier because Fannie and Freddie won’t guarantee them. If a borrower stops making payments and the jumbo loan defaults, lenders know they’ll be on the hook for a big chunk of change.
As for limits on jumbo loans, that’s up to the lender. Once you’re in the realm of nonconforming mortgages, you can borrow as much as your lender will agree to loan.
Why loan limits matter
If the amount you want to borrow goes beyond the limits and you need to get a jumbo loan, your lender may require:
A stronger credit score. The minimum for a jumbo loan is typically 680, but some lenders may require an even higher credit score
More cash in the bank. Knowing you have cash reserves, and not too much debt, makes lenders more likely to approve your jumbo loan
A larger down payment. Requirements vary by lender and depend on your financial history
An extra appraisal. Some lenders may require a second opinion on the home’s value to be sure it’s worth the amount you’re borrowing
Additional fees. Since you’re borrowing a larger amount, there may be some extra steps in the loan process, leading to higher closing costs
Historically, interest rates on conforming loans have been lower than jumbos, but in recent years, the rate spread between the two has narrowed significantly. Some jumbo loans may now offer lower rates than conforming loans.