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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 set by the Federal Housing Finance Agency.
A jumbo loan is a type of mortgage that is too high to be guaranteed by , which are government-sponsored enterprises that set mortgage underwriting standards and purchase qualified loans from lenders. Loans that can be purchased by Fannie Mae or Freddie Mac — also called “conforming loans” — are considered safer investments for lenders than jumbo loans, and it can be easier for borrowers to meet their requirements.
With home prices rising in most areas of the United States, the FHFA has increased conforming loan limits for 2021. How large a loan you can get before it’s considered “jumbo” depends on where you live, as certain more expensive areas — like Hawaii or San Francisco — have higher limits. If you’re concerned about meeting the more stringent lender criteria required for approval for a jumbo loan, these new limits could allow you to finance a high-priced home with a conventional loan instead.
For 2021, the maximum limits for conforming loans are:
You can find the exact conforming loan limits for your area using the tool below.
If the amount you want to borrow goes beyond the limits of a conforming loan and you need to get a , your lender may require:
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.
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 upper 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.
Finding the right lender will require a bit of homework. Start with NerdWallet's picks for the top . You can also to help determine if now is the best time to start the preapproval process.