With the housing boom in the early part of the decade, jumbo loans became more and more commonplace in the home loan market. Defined as a loan that exceeds the loan limits for conventional loans as set by Fannie Mae and Freddie Mac, jumbo loans were defined as any loan that exceeded $417,000 before legislation in 2008 which temporary increased the limit to $729,750 or 125% of the median home value within the area, whichever was the lesser. While the increase was initially set to expire in December 2008, the new limits have been extended through 2010.
Because jumbo loans are a larger risk for lenders, however, very few people are able to qualify for the full $729,750, and many lenders have been shying away from jumbo loans entirely due to the shaky economic climate. Indeed, finding a jumbo loan can be difficult for a variety of reasons, including the fact that they are difficult to sell on the secondary loan market due to their risk and are therefore not as marketable as other loan programs.
Jumbo loans typically involve a higher interest rate than most loans, with rates beginning at a modest 5% (which is around the interest rate for traditional loans lately) and skyrocketing to 12% depending on credit worthiness. Buyers with subpar credit can expect, if they are not declined completely, to pay on the higher end of these interest rates while buyers with excellent credit can expect an interest rate on the lower end. Credit worthiness is a large concern for jumbo loan lenders, who are all too aware of the risks posed by these loan programs and seek to mitigate them wherever possible through extensive credit checks and tight credit requirements.
The down payment required for jumbo loans continues to increase in the face of tight economic times, and while the traditional down payment for most loan programs has long been around 20%, jumbo loan down payments are often well in excess of this. ING Direct, for instance, requires a 30% down payment for single family homes (up from 20% in 2009) and has a minimum down payment of 45% for condos.
Jumbo loans can be beneficial for buyers in higher end markets and for those who are seeking to consolidate debt into their homes. However, applying and qualifying for such a home loan can often be an arduous and difficult process, and buyers should make every attempt to avoid these loan products if they do not have a large amount of cash saved for a down payment or have blemishes on their credit report.
