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Chapter 11. Jumbo Loans

┠What is a jumbo loan?

┠Can I avoid having to get a jumbo loan?

What is a jumbo loan?

As the name implies, a jumbo loan is a loan for a large amount of money. A loan is a jumbo loan if it exceeds the maximum amount of Fannie Mae and Freddie Mac programs. Because exceeding the loan amount allowed by Fannie Mae and Freddie Mac guidelines means that the loan does not conform to the guidelines, the jumbo loan is also called a nonconforming loan. There is no single standard amount that defines a loan as jumbo, since Fannie Mae and Freddie Mac change their maximums yearly based on changes of real estate prices. As of April 2008, the highest allowable amount for a single-family property mortgage loan in the continental United States was $729,750. Anything above that amount was considered jumbo. This amount will change as real estate prices rise or fall.

Loan programs for jumbo mortgage loans are as varied as smaller loans. There are fixed rate, adjustable, and hybrid jumbos. The loan- to-value ratio can be anywhere up to 100%. The term is also the same as smaller mortgage loans, the most common being fifteen and thirty years. A jumbo loan can be used to purchase or refinance a primary residence, vacation home, or investment property.

The strength of the borrower will determine the interest rate, just as with smaller loans. For equally qualified borrowers, the jumbo loan will have a higher rate — usually between .125% and .75% — than a conforming loan, depending on the size of the down payment and the lender's profit requirements.

Although the exact number varies with the lender, some lenders are using the terms good credit and excellent credit in their underwriting for jumbo loans. Excellent credit may get the borrower a lower interest rate or require less documentation than good credit. Generally, good credit would range from a FICO score of 650 to 700, and excellent credit would be above 700.

From the Expert

Although there is no real distinction, some lenders are classifying loans over $650,000 as super jumbo loans and offering special programs for these higher-amount loans.

If you are thinking of buying a home that will require a jumbo mortgage, you are faced with the same challenges that you would face for a smaller loan. Research to find the right lender offering the right program for you must be done for any mortgage loan.

Can I avoid having to get a jumbo loan?

Yes. A big disadvantage to the jumbo loan is that even a slightly higher interest rate over a conforming loan is magnified because of the large amount of money being borrowed. There is a way around this if you need a loan slightly higher than the maximum conforming limits. Many lenders now offer a conforming loan for the maximum allowed and a second mortgage loan for the balance needed. Since you are saving interest on the higher-amount first mortgage, you can afford to pay a higher rate on the second and still come out ahead.

Example: Since conforming loan maximums change with the real estate market and region, suppose $450,000 is the conforming loan limit. You need to borrow $460,000. Instead of paying the higher interest of a jumbo loan, you get a second loan for $10,000. Since the higher interest of the jumbo loan would be paid on $460,000, the savings are considerable. You could pay over 15% interest on the second (although you should not have to) and still come out ahead, using a difference between the rates of a jumbo and conforming loan of only .25%, with interest on the conforming loan at 7%.

Chapter 12. Prepayment

┠Do I really need to know more about prepayment?

┠What changes in the industry affect prepayment today?

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