What Is Considered a Jumbo Mortgage?
Home buyers who are trying to buy an expensive home may need to apply for a jumbo mortgage. Jumbo mortgages are subject to different interest rates and conditions than other mortgages. The loan amount that determines whether a mortgage is jumbo or not depends on the area of the country where the home is located.
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Identification
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Jumbo mortgages are home loans that are too large to qualify for government sponsored mortgage insurance programs. The Federal Housing Administration--FHA--provides insurance programs that protect lenders if a homeowner defaults on a mortgage. The FHA sets limits on how large a mortgage can be insured under the government programs. Mortgages that meet the FHA limits are said to be conforming loans. Loans above the FHA limits are non-conforming or jumbo mortgage loans.
Significance
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Conforming mortgages--less than jumbo size--are eligible to be purchased and securitized by Fannie Mae and Freddie Mac. This allows mortgage lenders to easily sell originated mortgages and make more loans with the money. There is no ready buyer of jumbo mortgages, making it more difficult and costly for mortgage lenders to underwrite and approve the larger, jumbo mortgage loans.
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Size
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The FHA sets the limits for the maximum loan value that will qualify for FHA insurance. The limits vary in different areas of the country, according to the average prices of homes. The lowest level in 2010 for the conforming maximum is $271,050 in low cost housing areas. The highest limit in the continental U.S. is $729,750. FHA loan limits in different parts of the country will be between these two numbers. Mortgage loans above the FHA limit in an area will be jumbo loans.
Effects
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Borrowers who need a jumbo mortgage loan to finance or refinance a home will pay a higher interest rate than for a conforming loan. A Boston Globe article noted that jumbo loan rates were 2 to 3 percent higher than the rates for conforming loans. The article stated that jumbo loans cannot be easily sold in the secondary market.
Considerations
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To get approved for a jumbo loan, borrowers need to be able to put up as large as possible cash down payment or have significant equity in the home for a refinance mortgage. Jumbo borrowers also must have an accurate financial statement and mortgage application. The Banking My Way website recommends using a mortgage broker to get quotes from numerous lenders to find the best jumbo loan rates in your area.
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References
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