A "Jumbo Mortgage" is a mortgage loan that is for a total amount that is more than what is allowed by standard limits. Jumbo loans are just mortgages for larger amounts than usual. A "conforming, conventional" loan is the gold standard of "normal" in the lending industry. This is a loan that meets the standard underwriting requirements of the secondary market agencies for credit, proof of income and assets, property features, etc.
As of February 20, 2007, the most this "conforming" loan can be used for is $417,000 for a property with one unit, $533,850 for a property with two units, $645,300 for a property with three units, and $801,950 for a property with four units. The limit for conventional second loans is $208,500, and all loan limits are 50 percent higher for properties in Alaska, Hawaii, Guam, and the U.S. Virgin Islands. The real estate market makes these limits change from time to time.
Most lenders are willing to lend more than these conforming amounts, but if you don't pay back the loan, the bigger the jumbo loan amount, the more risk the lender takes. Simply put, the more the bank lends, the more it stands to lose if something goes wrong and they have to foreclose on that property.
Since the size of the loan makes the lender take on more risk, they usually charge a higher interest rate than they would for a loan that stays within "conventional" loan limits. The premium that each lender adds to jumbo loans is different, but as a general rule, you can expect to pay about 0.5 percent more in interest than you would for an otherwise identical conforming loan.
With traditional lenders, the amounts of these jumbo loans are set, especially if they are backed by Fannie Mae or Freddie Mac. In other words, a mortgage for $417,000 at 6% from one lender will almost always be about 6.5 % from the same lender for a loan for $417,001.
