Each year, the government sets a limit on how large a conventional mortgage can be. In most parts of the country, that limit is a little over $832,750, although it’s higher in some more expensive housing markets. In short, if you need to borrow more than that limit, your mortgage is considered a jumbo loan. If your loan amount stays under the limit, it’s a conventional loan. The difference is based purely on the amount of money you need to borrow and what you qualify for. Loan limits are subject to change and vary by location.

Why Is There a Limit For Conventional Loans?

Conventional loans can be purchased by government-sponsored entities like Fannie Mae and Freddie Mac. Because these loans follow specific size and qualification rules, they are viewed as less risky for lenders. Jumbo loans cannot be sold to those entities. That means the lender keeps more of the risk, so they typically require stronger financial qualifications from borrowers.

When Would You Use a Jumbo Loan?

You would need a jumbo loan if you are buying a higher-priced home that pushes your loan amount above the conventional limit. This often happens in areas where home values are above average or when purchasing a luxury property.

For example, if you are buying a $1.2 million home and plan to put 20 percent down, you would borrow $960,000. Because that amount exceeds the standard loan limit in most areas, you would need a jumbo loan to complete the purchase. Some buyers also choose a jumbo loan if they prefer to keep more of their cash available rather than making an extremely large down payment to stay under conventional limits.

The Positives of a Jumbo Loan

The most obvious advantage of a jumbo loan is that it allows you to finance more expensive properties. Instead of splitting your financing into two separate loans in an alternative option called a piggy-back loan, you can keep everything under one mortgage. In some cases, interest rates on jumbo loans are competitive with conventional loan rates and can even be lower depending on market conditions and borrower qualifications. Lenders often compete for highly qualified jumbo borrowers.

Jumbo loans may also offer flexible structures. Some lenders provide adjustable-rate options or other features that can help customize the loan to your financial situation. Of course, those features should always be reviewed carefully to understand the long-term impact.

The Drawbacks of a Jumbo Loan

Because lenders take on more risk with jumbo loans, the qualification standards are typically stricter. Jumbo loans typically require strong credit profiles and stable income. Specific requirements vary by lender and loan program. Down payment requirements are also commonly higher. While some conventional loans allow smaller down payments, jumbo loans often require at least 10 to 20 percent down, and sometimes more. This is just for example purposes only; your actual loan terms vary based on qualification

Finally, a jumbo loan represents a larger financial commitment. A higher loan amount means higher monthly payments and more interest paid over time. It also means you need to feel confident that your income is stable enough to comfortably handle the obligation. This is just for example purposes only; your actual loan terms vary based on qualification show less

Is a Jumbo Loan Right for You?

A jumbo loan is not inherently good or bad. It is simply a financing tool designed for larger purchases. If you have strong income, good credit, and financial stability, and you are purchasing in a high-cost market or buying a more expensive home, a jumbo loan may make complete sense. However, if stretching into a larger mortgage would make your monthly budget feel tight or uncertain, it may be worth reconsidering your price range.

Before moving forward, it is wise to review your overall financial picture, understand what monthly payment feels comfortable for you, and speak with a lender about the specific qualification requirements.

Buying a home is one of the largest financial decisions you will make. Understanding how a jumbo loan works helps you approach that decision with clarity and confidence. Visit our website¹ for details on the loan options available to Affinity members!

This information is for informational purposes only, is intended to provide general guidance, and does not constitute legal, tax, or financial advice. Each person's circumstances differ and may not apply to the specific information provided. You should seek the advice of a financial professional, tax consultant, and legal counsel to discuss your particular needs before making any financial or other commitments regarding the matters related to your condition.

¹ Retrieved from: https://www.affinityfcu.com/personal-banking/borrow/mortgage/mortgage