Article by Mike Dalpher
In the recent past there were many advertisements, especially on television, exclaiming the lender’s availability of “jumbo loans.” What, exactly, is a jumbo loan, and are there any benefits to having one?
A jumbo loan, or a non-conforming loan, is a mortgage that is above the conventional conforming loan limit established by the federal government. Fannie Mae and Freddie Mac, two governmental agencies responsible for the purchase of most residential mortgages in the United States, set the conventional conforming loan limits each year, and anything above that qualifies as a jumbo loan. As of 2010, the conventional conforming loan limit was 7,000 for areas of the United States–except Alaska, Hawaii, Guam, and the Virgin Islands, where the limit was 5,500. Homes with prices over these limits, in their respective locales, qualify for financing through a jumbo loan.
These loans are not as common as other types of mortgage loans. The market for these loans is relatively small because they are usually for jumbo homes, and individuals who are not wealthy enough to pay for such a residence without a loan; however, the need for these loans is still present because of the rising cost of modest homes in larger, more metropolitan cities. The number of lenders that offer loans of this size is dramatically fewer than a decade ago, and these two factors make the need for and ability to obtain these loans less prevalent than other types of home mortgages.Jumbo loans have their own unique circumstances. These loans are riskier for lenders because, should the loan go into default, such luxury properties are harder to sell because of the small market for them. To compensate for this, most lenders who offer jumbo loans ask for a substantially higher down payment from potential borrowers than they would more conventional buyers, and require two appraisals to make sure the home is really worth the asking price versus the one required by conventional borrowers. As such, if a jumbo loan defaults the chance that the lender is stuck with a property that is significantly less valuable than originally thought is very slim.
Another way lenders recoup the risk they assume when writing a jumbo loan is through a significantly higher interest rate on the loan than more conventional loan customers would see. Most of the time these excessive loans have interest rates 0.25% higher than normal, but can rise to as much as 1.5% higher than the lender’s conventional interest rate. Because of such special circumstances, it is harder for buyers to qualify for a these loans not only because of the larger down payment and the higher interest rate, but also because income, asset, and liability requirements are much stricter than their conforming counterparts. Lenders want to make sure, before lending out such a large sum of money, that huge loan borrowers are unlikely to default on the loan.
Most of the general home-buying public does not need, and therefore usually will not seek out, a jumbo loan. Those who are in unique circumstances and wish to purchase a home over the conforming threshold will need to prove their financial worthiness and fitness to their lender, be ready to put down a significant down payment, and be willing to pay a higher interest rate in order to qualify for such a loan. While there are still situations that call for a jumbo loan, this is not the first loan homebuyers should consider when shopping for a mortgage.
Recent Comments