What are Jumbo Loans?
Jumbo loans are mortgage loans defined as any single loan amount that is over the conforming loan ceiling- usually set by the FHFA (Federal Housing Finance Agency) – and which currently stands at $417,000 for a unit property in the contiguous U.S. This means that if your loan amount is anything over $417,000, it is considered a jumbo loan. However, different jumbo loan limits exist depending on where the property is located and the number of units on the property. For instance, for properties situated in the contiguous U.S., including Puerto Rico and D.C., jumbo loan limits for 1,2,3, or 4 unit properties are greater than $417,000, $533,850, $645,300, and $801,950 respectively. In the U.S. Virgin Islands, Hawaii, Guam, and Alaska the jumbo loan limits tend to be slightly higher i.e. for 1, 2, 3, or 4 unit properties, they are greater than $625,500, $800,775, $967,950, and $1,202,925 respectively.
From the foregoing, it is quite obvious that you can get quite a large loan amount in some parts of the country without having to enter jumbo loan territory. But more importantly, jumbo loans cannot be sold to Freddie Mac or Fannie Mae, so outside investors will have to buy these loans on the secondary market in scrutinized bundles, or lenders will simply keep them in their books.
Typically, jumbo loans carry a considerably greater risk for various reasons. Along with fewer available investors and larger loan amounts financed, they tend to be tied to luxury homes, which are known to be harder to dispose off in a short period of time, mainly due to the general lack of prospective wealthy buyers in the market. Also, during market shifts, luxury residences are more prone to shifts in valuation than their moderately priced counterparts.
Jumbo loans are characterized by higher mortgage rates
Because of the accompanying risks, jumbo loans carry slightly higher rates, although the difference is slight- it could be between .25% and .5% higher. Alternatively, borrowers stand to lose any lender credit that may be offered for conforming loan amounts.
A majority of mortgage lenders often offer similar loan schemes for jumbo loans as happens with conforming loans e.g. interest-only home loans, ARMs, and fixed-rate loans. In fact, borrowers may even be able to secure zero down jumbo mortgages without much of a fuss as most lenders are nowadays able to provide 100% financing on deals with a limit of about $1.5 million.
Super Jumbo Loans
Some types of jumbo loans are also variously referred to as super jumbo loans, much to the excitement of loan officers and mortgage brokers who mistakenly think that they have a mega deal on their hands (and huge dollar signs in their eyes). While there may be some truth in this argument, true super jumbo loans are those whose amounts are above $650,000, and range up to $20 million or higher. This term, however, is often used incorrectly on a daily basis depending on the state where the overzealous officer resides. Remember, you can easily break up your super jumbo loan into a first and second mortgage in order to avoid paying more for it. Just ensure that the combined rate will ultimately be cheaper than what it otherwise would have been.