What does “Jumbo Loan” mean? First let’s define the terms, "Conforming Loan" & "Jumbo Loan".
What is a Conforming Loan?
A conforming loan is a more conventional mortgage whose terms and conditions meet the funding criteria of Fannie Mae and Freddie Mac—mainly, a dollar limit on the size of the loan.
What is a Jumbo Loan?
A Jumbo Loan is a mortgage loan that may have high credit quality but is in an amount above conventional conforming loan limits.
Guidelines for getting a Jumbo Loan
Each year in October, the Federal Housing Finance Agency, or FHFA, collects data on the national median home value and compares that number to October of the previous year. If there is an increase, the conforming loan limit will increase by the same amount.
In October 2019, the year-over-year median home value increase was 5.38%. Therefore, the conforming loan limit for a single-family home in 2020 will rise to $510,400, up from $484,350.
With a conforming loan, lenders are able to sell the mortgage in the secondary market, replenishing their credit lines in order to make more loans. Jumbo loans have no such robust secondary market. When a lender approves a jumbo loan, it assumes the risk should the loan ever go into default.
Qualifying for a jumbo loan will have stricter guidelines and requirements. The minimum credit score for most conforming loans ranges from 580 to 620. Jumbo minimums range from 720 to 740. Some jumbo loans can require a lower score, but the rates and terms are much more stringent.
Down payment requirements for jumbo loans are also much higher. A buyer can secure a conforming loan with a down payment of just 5% (or even 3% for special first-time programs) with the help of private mortgage insurance. Jumbo loans have no such insurance policies available and require a minimum down payment of 20% of the sale price of the home. Providing a down payment of 25% or more will make it easier to qualify.
