What Is Considered a Jumbo Loan?
The term jumbo loan applies to the mortgage loan market. Mortgages that are classified as jumbo loans are underwritten and rated differently than non-jumbo, or conforming loans as they are often called. Home buyers or those trying to refinance an existing loan should understand the differences between jumbo and conforming mortgage loans.
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Identification
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The two government sponsored mortgage agencies, Freddie Mac and Fannie Mae, set the limits for the mortgages they will purchase. Often called conforming mortgages, loans accepted by the agencies qualify for the lowest interest rates. Freddie and Fannie set a maximum limit for the amount of mortgage they will accept. Mortgages for a higher value than the conforming limit are called jumbo loans and cannot be accepted by Fannie and Freddie.
Size
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Since 2006, the limit for a conforming loan in most areas has been $417,000. Certain high cost areas have had a conforming limit of up to $729,750 since 2008. Any mortgage loan above these levels are considered jumbo loans or mortgages. High cost areas are designated counties primarily in California, Colorado, Florida, Maryland, Massachusetts, New Jersey, New York, Virginia and Puerto Rico. Some other states have a county or two that qualify for the higher limits. And in Alaska, Guam, Hawaii and the Virgin Islands, conforming loan limits are set across the board at $625,500 and in high cost areas at $938,250.
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Effects
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Home buyers for homes that require a jumbo loan will typically have to put down a larger down payment and pay a higher mortgage rate. Conforming FHA qualified buyers and loans, for example, can be approved with a 3 percent down payment. Jumbo loans will require down payments of 10 to 20 percent. After the financial crisis of 2008, jumbo loans became significantly more expensive than conforming mortgages. At one point, when conforming mortgage rates were at about 5 percent, jumbo loan rates rose above 6 percent.
History
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After the financial crisis, the number of lenders who would take jumbo loans decreased significantly because they were unable to sell them on the secondary market without Fannie Mae and Freddie Mac as buyers. As the federal government continued to support the conforming loan market by purchasing conforming mortgages, the spread between conforming rates and jumbo rates widened to almost 2 percent. By Spring of 2010, the spread had narrowed and, according to the "Los Angeles Times," the jumbo market was showing signs of recovery.
Considerations
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Potential home buyers looking at homes where the mortgage will be above $417,000, or above $729,750 in a high cost zone, should be aware of the extra rate and down payment requirements of jumbo loans. For sellers, the jumbo loan cutoff makes it more difficult for a buyer to qualify for a mortgage if the amount borrowed will be above the qualifying loan limit.
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References
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