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Money Matters

Jumbo loans

Dear Money Matters,
What is considered a jumbo loan?

Dear Lillian,
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.

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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

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Types of mortgages
Jumbos just got bigger
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