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Jumbo loans are just one of the many mortgage choices you have when buying a home or investment property. Unlike other options, though, these are designed for pricier home purchases -- ones that exceed the conforming loan limits of $548,250 (higher in some markets).
Are you currently eyeing a larger-than-average property purchase? Here’s what you need to know about jumbo mortgages.
What’s a jumbo loan?
A jumbo loan is a type of conventional mortgage that exceeds the conforming loan limit for its county. In most places, this limit sits at $548,250, though in costlier markets, it goes up to $822,375.
Properties with multiple units also have higher conforming loan limits. For a four-unit property in the nation’s highest-cost markets, you could get a conforming conventional loan up to $1,581,750.
|Number of Units||Basic Conforming Loan Limit||Highest-Cost Market Limit|
At any rate, a jumbo loan is one that exceeds these limits and is therefore not eligible for purchase by Fannie Mae (OTCMKTS: FNMA) or Freddie Mac (OTCMKTS: FMCC). This makes them riskier for lenders for two reasons. First, they can’t sell the loan, so that means the lender will need to hold it in their portfolio until it’s paid off. And these loans have very high balances, which increases the risk of default (and loss for the lender).
Because of this higher risk, jumbo loans are typically harder to qualify for than your traditional conventional mortgage. They also come with higher interest rates.
Qualifying for a jumbo loan
These requirements will vary by mortgage lender, of course, but good credit and a hefty down payment are typically a given.
Jumbo loan mortgage rates
Jumbo loan interest rates are higher than what you’d see on a conforming mortgage, FHA loan, VA loan, or other home loan option. The exact rate you’ll get will vary depending on your lender, loan amount, and level of risk.
If you’re looking to get the best interest rate possible, plan to put down a large-sized down payment, and make sure your credit is in a good place before applying (no late payments, good score, etc.).
Pros and cons of jumbo loans
As with anything, there are both perks and drawbacks to using a jumbo mortgage loan for that next property purchase. On the upside, jumbo loans can allow you to purchase pricier homes, and they also don’t require mortgage insurance. This can save you money, both monthly and over the long haul.
The disadvantages, however, are many. For one, these loans are a bit harder to qualify for. You’ll need good credit, a low DTI, and a big down payment (another big con). You also might get a higher rate due to the risk level jumbo loans come with, and that means more spent in interest over time.
|High loan amounts||Harder to qualify for|
|Good for pricier purchases||Higher mortgage rates|
|No mortgage insurance||More closing costs|
|Not all lenders offer them|
Real estate investors and jumbo loans
Jumbo mortgage loans are commonly used by real estate investors, especially those buying multi-unit properties (which can get expensive quickly). Other options for higher-cost property purchases would be commercial loans, portfolio loans, hard money loans, or private money lenders.
The bottom line
Jumbo loans fund higher-cost property purchases, both for homebuyers and investors. They’re not without drawbacks, though, and borrowers of these loans should expect higher interest rates and a more difficult qualification process on the whole.
For more details on funding your investment property purchases, see our real estate financing guide.
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