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Expanding Market of Jumbo Loans

Home buyers and real estate agents across the nation hope that the economy recovery will reinvigorate jumbo loan lending opportunities. At times the situation looks bright, with more local banks entering the jumbo loan market and more national lenders returning to their previous activities. While the qualifying standards are tight, individuals with good credit and adequate income can still fund their purchase of luxury real estate across the United States or even affordable housing in high cost-of-living areas.

Jumbo Mortgage Background

Jumbo loans are granted for home mortgage amounts higher than the Fannie Mae and Freddie Mac conforming loan limits, commonly referred to as the jumbo loan limit. These limits are based on the number of units in the residence and its location. For example, a jumbo mortgage would be required for a single-family home in Omaha, Nebraska priced over $417,000 or a similar home priced over $729,750 in Los Angeles.

These limits are governed by the Housing and Economic Recovery Act of 2008 (HERA) and will remain in effect until at least September 2011. If the temporarily higher limits expire, then jumbo loan processing will start at a lower threshold. The government has not set a maximum jumbo loan limit, but homebuyers interested in multi-million-dollar properties will find only a few banks willing to underwrite their funding.

Characteristics of the New Jumbo Loan Market

Jumbo loans represent less than 10% of the home loans originated in the United States, but the need is still present. Due to the economic issues of the past few years, the number of banks offering these high-balance, non-conforming mortgages is finite. At the same time, lenders expect borrowers to meet tougher standards, such as an 80% loan-to-value ratio (20% or more down payment), a debt-to-income ratio lower than 45%, and a credit score of 720 or higher.

Due to the additional risk of default, jumbo mortgages carry higher interest rates. Borrowers with jumbo loans over 2.5 points higher than the average prime rate will also be expected to use an escrow account for payments.

Overall, the jumbo loan market has been oscillating based on external conditions. For instance, the market swelled as individuals used their first-time homebuyer credits and then returned to a minimal level when the credits expired. Until lenders can reduce their risks and investors can earn stable returns, anyone interested in a jumbo mortgage should take advantage of opportunities as they arise.