Jumbo loans are mortgages that exceed the amount that the Federal National Mortage Association (Fannie Mae) or the Federal Home Loan Mortage Corporation (Freddie Mac) will insure.
The current limits for loans backed by Fannie Mae or Freddie Mac are as follows:
One-family: $417,000
Two-family: $533,850
Three-family: $645,300
Four-family: $801,950
These are the limits for what are called "conforming loans," as they conform to Fannie Mae and Freddie Mac guidelines.
Jumbo loans are referred to as "non conforming loans," because the mortgage amounts exceed the above limits.
Because jumbo loans are considered non-conforming, some lenders view them as being more risky. Another risk factor for lenders with jumbo loans is that such loans are often for luxury homes, and luxury homes are harder to sell quickly due to fewer potential buyers. On top of that, the value of a luxury home often is more volatile when the housing market softens.
To offset this additional risks, most lenders will charge higher interest rates for jumbo loans, usually 1/4 to 1/2 a percentage point higher than for conforming loans.
In many parts of the country, a $417,000 home is common for a middle class family, and no longer is considered a "luxury home." Thus, lenders are more likely today to approve a jumbo loan than they were in the past.
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