Are you thinking about buying a house that costs more than $400,000? Unless you plan to put down a large amount of cash on your new home, you will probably need to apply for a jumbo loan. A jumbo loan is just a mortgage for a home in the continental United States that costs more than $417,000. The money can be used to buy a new home or pay off an existing mortgage. For people living in Alaska, Hawaii, Guam, and the U.S. Virgin Islands, a mortgage is considered a jumbo loan only if it is more than $625,000.
Jumbo loans are just mortgage loans for amounts that are more than what Freddie Mae and Fannie Mac, two government-backed companies that are the two biggest players in the secondary home loan market in the United States, say the limit for conforming home loans is. Because of this, jumbo loans are sometimes called "loans that don't fit the rules." Jumbo loans are bigger than what the Federal Housing Administration (FHA) can approve. This means that lenders who give out jumbo loans (1) can't sell the notes to either of the two biggest secondary market lenders in the US and (2) can't get help from the FHA if the loan goes bad.
Jumbo loans are not offered by all lenders. If you want to apply for a jumbo loan, you should let your loan officer know as soon as possible. If you don't, you and the mortgage professional you're working with could end up wasting a lot of time if the lender he or she works for doesn't process nonconforming home loans.
Costs and risks of loans over $1 million
Jumbo loans are more expensive to get and process than conforming mortgages because they are seen as one of the riskiest types of mortgage loans. When lenders give out jumbo loans, they take on more risk than when they give out regular loans. Because of this, they usually charge higher interest rates for jumbo loans than they do for regular loans.
Jumbo loans cost the lender more to underwrite than smaller mortgages, and the borrower has to pay for these extra costs. The fact that these loans are not eligible for FHA underwriting is one reason why the cost of jumbo loan underwriting is so high.
Also, organisations that underwrite jumbo loans risk losing a lot of money if a borrower doesn't pay back the loan. In this price range, it can be hard for guarantors to get their money back by selling foreclosed homes. There isn't a big market for luxury homes, so there is a good chance that a foreclosure home won't sell or will have to be sold for much less than the loan balance.
Because the effects of a jumbo loan foreclosure are so bad, it can be hard to get approved for this kind of loan. When approving loans in this category, it is common for lenders who do participate in the jumbo loan market to have very strict rules. Most of the time, the creditworthiness requirements for jumbo loans are stricter than those for smaller, "conforming" loans that can be backed by the FHA and are easier to sell on the secondary market. A lot of jumbo loans also require a minimum down payment of 20%.
The 2007 mortgage crisis had a big effect on the market for large loans.
Investors in the mortgage industry are less interested in jumbo loans than they have ever been because of the way the mortgage market is right now. One of the biggest worries about jumbo loans right now is that it might be even harder than usual for lenders to sell these types of loans to mortgage investors. Many private finance and investment firms are hesitant to invest in the nonconforming loan market because of the extra risks that come with jumbo loans. This is because so many big players are still hurting from the mortgage meltdown of 2007.
What the status of a Jumbo Loan Means for Home Buyers
In many parts of the country, there aren't many homeowners who want to take out jumbo loans. In most of the U.S., the median price of a home is less than $250,000. This means that jumbo loans are likely only for people who are shopping at the very top of the housing market.
But in many large cities, the average home price is much higher than the maximum jumbo loan amount. In parts of New York, California, Connecticut, Massachusetts, and many other states with high costs of living, it is almost impossible to find even a small home for less than the lower limit for jumbo loan programmes.
Even buyers at the lower end of the housing market have to deal with the difficulties of getting a jumbo loan if they want to buy a home in these areas. Not only do they have to deal with the most expensive housing prices in the country, but they also have to pay more for their mortgages, even if they choose a modest home.
