MOVIN' ON UP - JUMBO LOANS

JUMBO LOANS DEFINED

Jumbo loans are conventional loans that exceed the maximum loan limit set by Congress for Fannie Mae and Freddie Mac (currently $300,700). Mortgage lenders also refer to jumbo loans as nonconforming loans because they do not exactly match the underwriting guidelines established by Fannie Mae and Freddie Mac. Super jumbo loans are more informally defined; depending on the region, they can range from $500,000 to $2 million. Generally, they include loans that reach $625,000 or more.

Jumbo loans were first introduced in the late 1970's as an option for affluent borrowers who could afford higher mortgage payments, but were unable to find conventional financing. The jumbo loan allowed them to avoid paying cash for a home and set up a financing plan similar to that for conforming properties. These loans are now even more necessary due to the fact that in many areas prices of average homes exceed the maximum loan amount. The areas where jumbo and super jumbo loans are most prevalent include Northeast and Mid-Atlantic states, Texas, California and Florida.

BENEFITS OF JUMBOS FOR YOU AND YOUR LENDER
For consumers who can afford it, a jumbo loan is beneficial because it allows a buyer to purchase a million dollar home (or a $300,000 home) with long-term financing that is fully amortized. Lenders, on the other hand, are attracted to the profitability of jumbo or super jumbo loans. Origination costs are generally lower, and because of the increased risk, lenders can impose higher rates. But profit does not rule in the jumbo loan market. In fact, some lenders pay little heed to the profit question. For them, service is top priority. Although affluent borrowers certainly do not disregard cost, many are more concerned with service. Lenders, therefore, are more apt to place service ahead of profit.

THE OTHER SIDE OF THE COIN
Understandably, mortgage lenders may be more cautious when analyzing jumbo loan applications. Borrowers, therefore, may be required to supply additional documentation on credit worthiness, assets, debts and employment stability. Often the lender will require multiple property appraisals. In addition, the loan-to-value (LTV) ratios for jumbo loans are usually reduced, forcing the borrower to make a larger down payment. Interest rates may also be higher (about .25% to .50%). Mortgage lenders, who may face higher risks and higher costs of failure with jumbo loans, protect themselves with lower LTV ratios and higher rates. They also depend on the fact that jumbo loan borrowers as a whole boast high quality credit histories, and a record of low delinquencies.

As the market for jumbo and super jumbo home loans increases, lenders are recognizing that high risk factors may be curtailed simply by the fact that affluent borrowers, in general, are good credit risks. In addition, as jumbo loan values increase, their profitability will demand institutional backing, thus expanding the secondary market of jumbo loans. So while phone companies and cookie makers find their niche in small pockets and dainty treats, mortgage lenders are going for the super size.

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