Understanding Jumbo Loans
When a regular loan just isn't enough: Nonconforming loans exceed the limits set by the FHFA. They're called jumbo loans because they’re for more money than most loans would permit you to borrow.
While jumbo loans are easy to find, they’re not all the same.
Lenders set their own limits on jumbo loans. Qualifying is more challenging than qualifying for a conforming loan. You’re borrowing more money, so lenders need to feel extra confident you’ll repay it. Some lenders want to see a sizable cash cushion in your accounts, so be ready to show you have enough cash to cover 6-12 months of payments.
Pros
MORE MONEY
When the conforming loan limit set by FHFA won’t cover the cost of the home you’ve got your sights set on, a jumbo loan may be your best option for borrowing as much money you need.
FLEXIBLE INVESTMENTS
Jumbo loans can be used to purchase a primary residence, vacation home or investment property.
FLEXIBLE OPTIONS
They come with either fixed or adjustable interest rates, and in a variety of terms, usually 10-30 years.
Cons
QUALIFYING
Jumbo loans come with rigorous qualifying requirements. The approval process is tougher. Lenders prefer a down payment of at least 15% and a debt-to-income ratio under 35%. They may also require two appraisals to confirm the value of the property.
EXPENSE
Dollar for dollar, jumbo loans cost more. In addition to the higher principal amount, you’ll have a higher interest rate—usually 1% to 2% higher than the conforming loan rate. And unless you pay 20% down, you will also be on the hook for private mortgage insurance.
DEDUCTIBILITY
Mortgage interest deductions are capped at $750,000, so homeowners with larger mortgages may not be able to deduct the full amount they pay in interest.
