Looking at larger "jumbo" loans.

Learn why jumbo loans may be an option in higher-priced housing markets.

When you start to explore your home loan options, you may hear the term "jumbo loan" come up. If you do, it is usually because you live in a high-priced real estate market, you are looking at properties that are more expensive than average, or both. If you are considering homes for which you'd borrow over $400,000, it's a good idea to find out more about jumbo loans and be prepared to discuss them with your lender.

What Makes a Loan Jumbo?
A loan is jumbo if it exceeds what is known as the "conforming loan limit." This limit is set by Fannie Mae (a U.S. government-sponsored enterprise chartered by Congress) and is based on the median home price nationwide. For 2009, the limit in place for a single-family home in most areas of the country is $417,0001. But, if you live in a designated high-priced market, your limit may be higher. For instance, if you live in California's Napa Valley or in Washington, D.C., your maximum conforming loan limit is $729,7501. And if you live in the Santa Fe, New Mexico metro area, the limit may be $427,5001. Additionally, limits are different for multi-unit properties.

Homebuyer Tip: Each year, a new conforming loan limit is published by Fannie Mae. You can get the limit for your area from your lender, or you can find it in the Loan Limit Look-Up Table on the Fannie Mae website.

How Are Jumbo Loans Different?
If you are considering a property with a purchase price that will require you to get a jumbo loan, be sure to let your lender know, so they can help you run the numbers and explore your options. These loans may be available with fixed- or adjustable-rate options, but they are generally harder to get and have higher interest rates. The cost of jumbo loans can be as much as 1.5% higher than loans that fall within the conforming limit. This could mean that you'd pay more in interest on a jumbo than on a conforming loan.

Qualifying for a jumbo loan usually requires higher credit scores, lower debt-to-income ratios, and sometimes even larger down payments than conforming loans. These differences vary by lender, so ask yours to provide you with their specific jumbo loan costs and requirements. For more information on credit scores and debt-to-income ratios, see Taking control of your credit score and How lenders look at your debt.

What Are Your Options?
In some high-priced markets, even smaller homes require a loan above the conforming loan limit, which can be difficult for first-time homebuyers. A jumbo loan may provide an opportunity to buy into these high-priced markets, but other options include:

Increasing your down payment. This is the simplest option. If you can put more cash toward the down payment, you will borrow less money. This could be especially helpful to you if the loan you are considering is only slightly above the conforming loan limit. For more information about down payments, see Saving up for a down payment.

Consider obtaining two loans. This option is more complex. It entails taking out a second, smaller mortgage at the same time as the first. Getting two loans at closing might keep your mortgages under the conforming loan limit and potentially allow you to receive a lower interest rate on the "conforming" first mortgage. However, having two loans may increase your risk, because you must be sure you can pay both loans each month. In addition, the interest rate on a second mortgage is typically higher than on a first mortgage, so you'll need to calculate the costs and potential savings carefully.

If you're planning to buy a home in an area where higher-priced properties are the norm, or if your budget allows you to consider a jumbo loan, talk with your lender. Together you can work through different scenarios to see if it makes sense for you to save up a larger down payment before you buy, get two loans, or take out a jumbo loan. Whatever option you choose, you should be confident that you can make all your loan payments in full and on time without overextending your budget. Understanding the full costs and terms of various loan options can help you make the best decision for your situation. For more information on your loan options, see Selecting the right mortgage for you.