When any single loan amount goes over the conforming loan limit, it is considered a “Jumbo Mortgage.” Currently, that limit is set at $417,000 in most areas of the country, but there are some places where the limit can be set at a higher amount. These loans were originally designed to help high-income homebuyers afford the luxury homes or get into the more desirable areas. However, as the prices in the housing market continued to grow, more and more middle-income buyers started turning to jumbo mortgages to get into their homes.
Jumbo loans do carry a bigger risk than most other conventional loans, though, because they are not backed by Fannie Mae or Freddie Mack. It can also be more difficult to qualify for these loans, and the borrower will need to have amazing credit and be able to put down a significant amount of money upfront. (Depending on the situation, this could be anywhere from 5% – 20%.)
Interest rates for a jumbo loan can also be higher than most standard, conventional loans. Although this may only be a half of a percentage point higher, the borrower will still end up paying more interest over the life of the loan. There could also be some additional costs if they ever decide to refinance their mortgage. Getting a loan that goes over the conforming limit is a serious decision, and you need to be sure to consider all the implications.