A jumbo loan is one where the loan amount is higher than the loan limits set by the Federal Housing Finance Agency (FHFA). Currently Jumbo Loans are anytime where the loan amount is higher than $726,200. Normally these are homes worth $800,000, $900,000 or higher price tags in many cases. These loans typically come with a higher interest rate, stricter underwriting guidelines (including a higher credit score requirement) and require a larger down payment than your everyday home loan.
For a further explanation, it is important first to understand the terms “Conforming” and “Non-Conforming” in mortgage lingo. When a home loan is “Conforming,” that means it fits all the requirements and guidelines set by Fannie Mae and Freddie Mac, the two government-sponsored entities (GSEs) which buy mortgage loans in bulk from lenders like Fairway, then bundle them and, in turn, sell them to investors on the open market. These bundles, called Mortgage-Backed Securities (MBS), are considered very safe investments because there has traditionally been very little risk of default among the home loans within these bundles. One of the requirements set by Fannie and Freddie is home price; basically, higher home prices are one factor that can increase risk.
If the home is more expensive than the loan limits set by the FHFA, that home loan is considered a little riskier of a proposition than one that falls under the Conforming limit, so these “jumbo” mortgages are therefore considered “Non-Conforming,” and are not bundled into Mortgage Backed Securities alongside conforming loans.
But at Fairway, we don’t consider you a risk just because you’re trying to buy enough home for your growing family or refinance a jumbo loan! Keep in mind, all the things explained above are happening behind the scenes; they don’t really affect you during the home-buying process. Your Fairway mortgage advisor will be able to provide guidance if a jumbo loan best suits your needs and goals.
If you have good credit, but don’t have enough funds on hand to bring your home loan amount under the FHFA’s current conforming loan limit, a jumbo home loan might be the right option for you.