Archive for May 1st, 2011

Basics of Jumbo Mortgage Loan

A jumbo mortgage loan is a type of home loan that is beyond the average loan amount set by Fannie Mae and Freddie Mac. This type of loan is rarely available that is why it is charged a higher interest rate. The limit of the loan amount is based on the original cost of the principal instead of the resale value of the property. The Federal National Mortgage Association sets a higher limit for a jumbo loan.

The current average limit for a mortgage in the US amounts to $417,000. However, the Housing and Economic recovery Act of 2008 enhanced the definition of loan by raising the limits for high-cost areas in the country. These areas are given a limit of $625,500. Alaska, Guam, Hawaii and U.S Virgin Island properties are considered high-cost. The limit in these U.S territories has been raised up to $938,250. To qualify for this loan, borrowers must make a down payment of at least 20 percent. Moreover, before loan approval, an extensive underwriting process must be undergone by borrowers and the lenders validate their monthly incomes.

Jumbo loans are similar to confirmation loans. Their only difference is that jumbo loans have higher interest rates. Because of this, jumbo home loans are considered riskier than confirming loans. Most jumbo loans are set up for luxury properties. Lenders usually charge higher interest and require higher down payments for this loan. Jumbo loans are charged an extra 0.25 to 0.50 percent compared to rates of confirming loans. The rate is based on the pricing of risk in the current market.

The advantage of jumbo loans is that it is easy to refinance and make changes in the loan. Loan modifications are especially done if it is obtained from a single financial institution. Each bank has different rules and policies that customers respond to in various ways. Another advantage of jumbo loans if obtained from a single bank is that the short sale process is easier. This has been the widely used process in selling houses in most communities.