What is a Jumbo Loan?
A jumbo loan, or a jumbo mortgage, is a non-conforming loan that goes past the cap set by the Federal Housing Finance Agency. Jumbo loans cannot be guaranteed by Fannie Mae or Freddie Mac. The conforming loan limit—the limit that a loan must fall under to be eligible for Fannie Mae or Freddie Mac to guarantee—is currently set at $484,850 for Colorado and most of the United States.
Loan Scenario for a Jumbo Loan
If you are seeking to purchase a home and will need more than $485,850 then a jumbo mortgage is the loan type for you. Jumbo mortgages are often used for buying luxury properties and properties with higher price tags. Jumbo loans are a good fit for those earning at least $250,000 annually, but who do not yet have an accumulation of cash and/or equity to allow them to bypass the need for a non-conforming loan.
Pros of a Jumbo Loan
The advantages of a jumbo mortgage:
- Can borrow above the conforming loan limit
Challenges of a Jumbo Loan
- Loan requirements are harder to meet. Borrowers will need a higher credit score and a lower debt-to-income ratio.
- Interest rates are typically higher than conventional loans
- Other borrower requirements, such as liquid cash reserves and cash on hand are more stringent than for conventional loans
- Down payment requirements typically require at least 10%. However, a down payment of 20% will be needed to avoid private mortgage insurance
- Mortgage interest deductions are capped at $750,000 of mortgage debt
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