Jumbo loans are an investment tool they’re not for the average borrower. Or so we thought. Today, however, thanks to the boom in real estate prices, and the ever declining value of the dollar, more and more average consumers are applying for these jumbo loans, and using them to finance a home purchase.
The most typical area to see the home prices rising to a level that makes a jumbo loan necessary is in your resort area housing. Many of these homes have escalated tremendously in price over the last couple of years, and the loan needs have risen to all time highs. The jumbo loan has now become a real mortgage product, not just an investing tool.
Before we get too deep into the real estate market, and the use of the jumbo loan, perhaps we’d better define the jumbo loan and the consequences of financing your mortgage in this manner.
The jumbo loan is a loan amount that exceeds $510,400 in most areas, higher amounts in high value areas. In fact, this is the defining characteristic of the jumbo loan. The other “baggage”, if you will, that often accompanies these loans, is the large amount of paper work, higher private mortgage insurance, and the higher interest rate. It might also be interesting to know, that Freddie Mac and Fannie Mae, the two largest mortgage buyers in existence today, usually establish these limits, and dictate to many lending companies exactly what they will buy, and how. It should not need to be mentioned that these loans present a bigger risk than the other, traditional loan needs, and therefore must meet some rigorous requirements.
Now, having explained the definition of the jumbo loan, it deserves to be said that there are alternatives to avoid this type of loan, and still secure the funding you need to purchase a home, without using all your life’s savings to do so.
The jumbo loan can be broken down into a first and second mortgage, negating the need for a jumbo loan, and cutting through all the extra paperwork and interest expense. But, that’s another discussion. Another option homeowners have for avoiding the jumbo loan trap is to simply put enough down on the home to keep the amount financed below a certain level.
To further explain the role Freddie Mac and Fannie Mae play in the determination of the jumbo loan limits and expense, you need to understand how the mortgage market actually works, and the role these two companies play in that process. Today, if a mortgage company loans you money to purchase a home, you sign a waiver that states that you understand that your loan may be sold to another servicer. They should simply have you sign a form that says you know your loan is going to be sold; who is it? Freddie Mac and Fannie Mae. The mortgage companies find it necessary to resell your mortgage, in order to make another one. So, quite naturally, they must abide by the rules established through the buying companies. Jumbo loans can prove quite risky, so Freddie Mac and Fannie Mae don’t even purchase these types of mortgages. For the mortgage companies that do, there are set limits, and they require more information, larger proven income levels and adequate private mortgage insurance to assure that the home won’t go into foreclosure and auction.
In some areas of the country, there have been increases in the jumbo loan limits, simply because the housing market and home prices are so high, every home purchased would be a jumbo loan, if the limits weren’t extended. Most of these areas are resort homes, vacation homes, and property is scarce.
What is happening today, however, is the growing segment of the population that really needs the jumbo loan financing in order to buy their home; not make a business investment. What does this say about our real estate market, and the value of the property? Our real estate prices are increasing at an astonishing rate, and right along with that, is the increase in products being offered by the mortgage lenders, therefore, it only stands to reason that we would see an increase in the jumbo loan market. The current estimate for the jumbo loan market is generally around 15%; that is still a pretty large hunk of the mortgage market.
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