Jumbo LOans

Taking out a mortgage is a great way to build wealth and invest in your future, but there are some limits to the amount you can borrow. If you try to finance the purchase of a $1 million home, for example, you’ll quickly find out that conforming mortgages won’t apply. In order to achieve those homeownership dreams, you might have to apply for a jumbo loan, also known as a non-conforming loan.

For typical home loans to be approved, the amount of financing cannot exceed the loan limits set by the Federal Housing Finance Agency. These limits are put in place to create liquidity and stability in the housing market and make mortgages available to a wider range of borrowers. As of 2024, the FHFA mortgage limit will rise to $766,550.

When a borrower’s mortgage surpasses the FHFA’s caps, perhaps for a $1 million home, the standard mortgage structure no longer applies. These home loans are known as non-comforming jumbo mortgages and are usually taken out to finance the purchase of a larger home.

The credit risk taken on by lenders who issue jumbo loans, in addition to the sheer amount of financing provided, means the threshold for approval is higher than conforming loans. Among other conditions, securing a jumbo loan typically requires an excellent credit score, few ongoing debts and lots of money in the bank.

For a standard home loan, lenders can benefit from the security provided by the U.S. government. Organizations like Fannie Mae reduce some of the risk associated with lending, as well as offer the ability to resell loans on the secondary market. These quasi government guarantees help stabilize the real estate market, keep the cost of borrowing money low and work to maintain a healthy economy.

These protections fall away when a loan is designated as “non-conforming.” This distinction fundamentally changes the way lenders view mortgage applications and carries heavy implications throughout the mortgage process.

The conforming loan limit is the point where the mortgage amount tops the cap set by the FHFA, otherwise known as the conforming loan limit.

The conforming loan limit puts a cap on the size of a mortgage that can be purchased or guaranteed by Fannie Mae or Freddie Mac. These organizations allow lenders to fund mortgages with reduced risk by backing up a portion of home loans that follow an approved set of guidelines. Mortgages that are structured to meet these guidelines are known as conforming loans, while those that stray from the requirements are non-conforming.

According to FHFA.gov, the conforming loan limit for 2024 is $766,550, which saw an increase from 2023’s limit of $726,200. While this establishes a baseline loan limit for the nation, individual counties may have varied caps based on local real-estate market differences. An expensive neighborhood in Malibu, for example, might have a higher limit than the national limit because of the high average sales price of nearby homes. The loan limit in high cost areas is $1,149,825.

Whatever the conforming loan limit is for your specific area, any mortgage that exceeds that number will be a non-conforming loan.

Conventional home loans, such as 30-year fixed mortgages come with strict requirements that borrowers must follow in order to be approved. On non-conforming mortgages, such as a jumbo loan, that scrutiny can be even more intense. Since these mortgages can’t be backed by the government, lenders take on considerably more risk when approving a loan.

In addition, jumbo loans are truly “jumbo.” The large amount of financing provided by lenders for these mortgages makes conventional home loans seem small by comparison. As a result, the expenses associated with closing the loan will be higher.

Jumbo mortgages also can’t be backed by the government or sold on the secondary market like conforming loans, so expect your lender to set stringent requirements and a rigorous underwriting process in order for the loan to go through.

Jumbo mortgages are available in both fixed and adjustable rate structures. Depending on your own financial situation and the state of your target housing market, you might prefer one lending structure over another.