Dear Money Matters,
What is considered a jumbo loan?
The name "jumbo" truly reflects the product. A jumbo loan
is a mortgage with an amount that's larger than conventional loans.
Current guidelines identify a jumbo loan as any mortgage with an
amount larger than $300,700 for a single-family home ($451,050 in
Alaska and Hawaii).
Because jumbo loans exceed the boundaries of conventional
loans, they are known as "nonconforming loans." This classification
has an ominous ring to it, and, in some cases that connotation bears
out. Nonconforming loans as a group are loan products that, for
one reason or another, fail to follow traditional loan underwriting
guidelines. In some cases, a borrower may have prior credit problems
or an unusually high debt level. In the case of a jumbo loan, however,
the focus is on the size of the loan itself -- given that it's larger
than the usual amount, lenders treat a jumbo loan with a greater
consideration of risk than they would conventional loans.
That can also mean different sorts of underwriting
requirements for jumbo loans. In some cases -- for particularly
expensive pieces of property -- a lender may require two appraisals
to ensure that the value is, indeed, accurate. Moreover, applicants
for jumbo loans may also have to endure more-exhaustive investigations
into their finances, including income, debt level and other elements
that may affect their ability to pay back an unusually large loan.
Another reason jumbos are considered riskier is that
there's a smaller market for the homes they secure. While conventionally
priced houses attract a broad range of potential buyers, not as
many can afford homes in the $300,000-plus range. That can add an
extra element of risk. If somebody takes out a jumbo loan and proves
unable to meet the payments, it may be far more difficult to sell
the home and pay off the loan -- which makes lenders jittery.
Not surprisingly, that translates into higher interest
costs. The most recent figures I saw for the average for 30-year
jumbo mortgages put them at roughly two-tenths of a percentage point
greater than a conventional 30-year product.
-- Posted: May 31, 2002