If you are a home buyer looking to purchase a luxury home, you’re probably familiar with the mortgage term “jumbo loan” No one is really sure where the term was first coined but it describes a loan amount that is greater than conforming loan limits for the area. But how do you know exactly what the standard conforming loan limits are for your city? Or what is considered a jumbo loan?
In most parts of the country, the conforming loan limit is currently set at $647,200 and anything beyond that is called a jumbo loan. However, there are certain locations specifically Metropolitan Statistical Areas, or MSAs, where the median home values are much higher than most parts of the country and the conforming loan limit is greater than $647,200. In these areas, the conforming loan limit is referred to as “high balance” and can be as high as $970,800 and still be considered conforming.
Conforming or conventional loans refer to mortgage limits established by mortgage giants Fannie Mae and Freddie Mac and are the most pervasive of any loan program available. Each year, the average home value is reviewed and if prices are higher than the previous year, Fannie increases the loan limit by a similar amount for the following year until the next review.
Conforming loan rates are the most competitive and can be as much as 0.50% or more lower compared to a jumbo loan. But as we mentioned, a jumbo loan can be $650,000 in one area and but not be a jumbo loan in another where median home values are much higher. For example, a loan amount of $720,000 would be considered a standard conforming loan in San Fransisco, California but a jumbo loan in Atlanta, Georgia.
So does it matter where you live? Probably not. Few buy a home because of the conforming and jumbo loan limits. For those that do, they’re probably on their way to retirement and are searching for a low-cost area in which to retire. But for everyone else, you buy and finance a home near where you work and where your kids go to school. If the MSA is the higher end you’ll get a jumbo loan.
Luxury homes have much higher home values but if that’s where you want to live and work that’s where you’ll be. Instead, buyers look at sales prices of homes in a particular area and the amount of down payment they have available to finance the purchase. Today there are many 5% down and 10% Jumbo financing options available to qualified buyers. Read more all about the 90% and 95% Jumbo financing requirements at the link below.
Jumbo loans are approved in pretty much the same way as any other loan. Jumbo lenders will review your credit history and document your file with your financial documents such as your federal income tax returns, bank statements and other required documentation. But because there really is no central agency that buys mortgage loans from lenders like Fannie Mae and Freddie Mac do, while there are standard underwriting guidelines such as employment and income a jumbo loan can have its own guidelines.
Will the home values keep increasing in your area? Are values nearing the point where the median home value is approaching jumbo status? If home prices where you live are on the rise it could come to the point where new buyers will opt for jumbo financing when just a few years ago, conforming loan limits prevailed.
When you hear the phrase that “all real estate is local” it means the local real estate market plots its own direction. As the demand for properties in a particular area begins to rise, very soon the jumbo market takes over and financing costs will be slightly higher. Just remember that the term “jumbo” is indeed relative.
Buyers can learn more about purchasing and refinancing Jumbo loans here.