Info about Loans

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Jumbo Loans - Understanding the Basics

If you have never built or purchased a home before, then it is very important that before you do you understand the ramifications of buying or building a home that only qualifies for jumbo loans when it comes to the financing side of things. A jumbo loan is any loan for a home that is more than $417,000 with a few exception areas that allow the home loan value to be above that limit (these areas are called high-cost areas and include many places in California, New York, ect.)

So why is it so important that you understand what exactly a jumbo loan is? Well, that's because of how it will effect you if you only qualify for this type of loan. It will effect you financially in terms of the interest rate you will pay, and it also may affect you in terms of being able to get the loan in the first place.

Essentially, banks look at jumbo mortgages are being slightly higher risk for them to originate and underwrite than a traditional home loan. This is due to two primary factors. One, the loans are not eligible to be purchased or backed by the federal government via the mortgage agencies (FHA, Freddie Mac, Fannie Mae). Two, they are a little harder to resell and recoup the loan amount in case of default. There just isn't as many people who can afford homes over $417,000, and as such it can be more difficult for the bank to get the loan off their books if you default on the loan since it will take longer to sell the home.

So, while it may seem a little counterintuitive that larger loans on homes are more risky (due to the fact that to get such a loan you have to by default make or have more money), they are more risky from the lending institutions perspective. As such you can expect the mortgage rates jumbo loans to be higher with such loans.