Typically, when buying a home, you’ll find that you have different options for financing your purchase. While most buyers will take the FHA loan or conforming, conventional loan route, there are cases when you may need to consider a jumbo loan for financing.
A jumbo loan is necessary when the purchase price of your property exceeds the limits of a government-sponsored or conventional loan. These limits are created using guidelines on a county-by-county basis by government-sponsored entities, such as Fannie Mae or the Federal Housing Finance Agency, as well as the VA (Veterans Affairs), FHA (Federal Housing Administration) or USDA (U.S. Department of Agriculture) and are designed to reflect the home values in your area.
For example, the highest amount you could finance with a conventional loan in Broomfield County, Colorado, in 2021 would be $596,850. However, in Boulder County, where home values are inherently higher, the limit raises to just over $650,000.
These are simple examples, but the moral of the story is this: if you plan to finance more than the predetermined limit for the county in which you are purchasing, you’ll need to secure a jumbo loan.
As home prices have skyrocketed over the past few years, homebuyers in certain counties have found themselves unable to qualify for conventional loans because the amount needed to finance can fall outside of those loan limits. While the limits are adjusted annually, many have not kept up with rising prices. As a result, you may find yourself needing a jumbo loan to fund your home purchase, even if that home is less-than-jumbo in your mind.
On the surface, the application process for a jumbo loan is no different than the process of applying for a conventional loan. For either loan type, your lender will determine the value of your property through an outside appraisal. Your credit history and financial situation will be evaluated, including whether your current income will support the monthly mortgage payment.
Of course, there are also differences between applying for a conventional loan and a jumbo loan.
When a conventional loan meets certain requirements, banks have the option to sell these mortgages to one of two government-sponsored enterprises (GSEs) known as Fannie Mae and Freddie Mac. In doing so, the bank is able to raise more capital and offer more loans to customers.
Without this federal option, the bank must hold the loan on its balance sheet throughout the duration of the lending period. Since this is the case with a jumbo loan, lenders generally apply a higher level of scrutiny to borrowers to offset any risk, making a clean credit history and financial stability imperative.
Before you begin the mortgage process for a jumbo loan, here are a few more things to consider. First, if you plan to itemize and deduct the mortgage interest on your jumbo loan, your deduction will be capped at $750,000. This means you might not be able to deduct the full amount of mortgage interest you pay. You should always consult a tax advisor.
In some cases, it may also be trickier to borrow extra if you want cash available for additional home-related expenses after closing. This is referred to as post-closing liquidity and qualifying can be subject to even more stringent conditions if you’ve opted for a jumbo loan.
Last, you’ll want to consider how long you plan to remain in the home after purchase. The added scrutiny required to qualify for a jumbo loan means that not all potential buyers will be easily approved, limiting your future-selling prospects.
When seeking financing for a mortgage purchase, it’s important to discuss your plans and goals with your loan officer. She or he is in the best position to help you secure the most advantageous financing and to help you through the process of qualifying for the mortgage you desire or…the one you may possibly require.
The articles in this blog are for informational purposes only and not intended to provide specific advice or recommendations. When making decisions about your financial situation, consult a financial professional for advice. Articles are not regularly updated, and information may become outdated.