The Current Status of Jumbo Loans

Are you considering purchasing a house that costs more than $400,000? If so, you will likely need a jumbo loan unless you plan to make a substantial cash down payment. A jumbo loan is a home loan for properties that exceed $417,000 in the continental United States, or $625,000 in Alaska, Hawaii, Guam, and the U.S. Virgin Islands. These loans are necessary for either purchasing a new home or refinancing an existing mortgage when the amount surpasses these thresholds.

Jumbo loans, also known as nonconforming loans, exceed the limits set by Freddie Mac and Fannie Mae, the two largest players in the secondary home loan market in the United States. They also exceed the Federal Housing Administration’s (FHA) underwriting limits, which means that lenders offering jumbo loans cannot sell these notes to Freddie Mac or Fannie Mae and are not eligible for FHA default protection.

Costs and Risks of Jumbo Loans

Jumbo loans are generally more expensive than conforming loans due to their higher risk. Lenders assume greater risk with these loans, resulting in higher interest rates compared to conventional home loans. The underwriting costs for jumbo loans are also higher because they are not eligible for FHA backing. Additionally, if a borrower defaults, it is challenging for lenders to recover their losses since the market for luxury homes is limited, which can lead to significant financial losses if the property sells for less than the outstanding loan balance.

Due to these risks, approval for jumbo loans can be difficult. Lenders often have stringent creditworthiness criteria and may require a minimum down payment of 20% or more.

Impact of the 2007 Mortgage Meltdown on the Jumbo Loan Market

The 2007 mortgage meltdown has made jumbo loans less appealing to investors. The increased risk and the challenges of reselling these loans have led many private finance and investment firms to hesitate in the nonconforming loan market.

Jumbo Loan Status Implications for Home Buyers

In most parts of the U.S., where the median home price is below $250,000, the need for jumbo loans is limited. However, in high-cost areas like parts of New York, California, Connecticut, and Massachusetts, average home prices often exceed the jumbo loan limit. In these markets, even buyers looking at lower-end properties may face the challenges of jumbo loan financing, dealing with both high housing prices and the associated premium on mortgage funding.