A jumbo loan is a non-conforming loan in the sense that it does not conform to the usual standards of underwriting for Fannie Mae and Freddie Mac, the two pseudo-government loan agencies responsible for buying and reselling good-credit, low-risk mortgage loans. The stipulation of status with the jumbo loan is the fact of its being for a larger loan amount than that which falls within Fannie guidelines. The Office of Federal Housing Enterprise Oversight (OFHEO) annually sets the limits for the loan sizes that may be securitized by Fannie Mae or Freddie Mac.

Jumbo loans carry more credit risk than those issued by Fannie or Freddie because of their principal amount size, so they trade at a yield spread premium which leads to a little bit higher interest rates. But, in recent years, the amount of mortgage loan that Fannie or Freddie will cover for those who are credit-worthy has dramatically increased so that now mortgages defined as Jumbo Loans must exceed $720,000.

Yield spread premium directly compensate mortgage loan brokers from borrowers when borrowers pay an origination fee, yield spread premium (YSP), or a combination of these. Without these, the borrower is probably agreeing to pay an interest rate which is relatively higher. While some borrowers love to believe that there can be a “no-cost” mortgage, no such product exists, ever has existed, or ever will exist. However, paying a bit of a higher interest rate might not necessarily be a bad thing for the borrower if it reduces his borrowing costs on the whole, especially if the borrower is planning on moving in just a year or two.

Jumbo loans typically require the borrower to have superior credit. After all, these are loans on what is assumed to be a larger, more valuable house. Fannie or Freddie usually don’t carry the risk for these loans, and so you will be covered by institutions that carry extra credit risk by comparison. It’s assumed that you will have the ability to pay off a larger than average loan amount, and in order for you to do that you should have very good credit. Furthermore, since you are asking to borrow an amount of money that is higher than average for purchasing a loan, you need to show higher than average credentials for being able to pay that money back at interest.

More than that, too, you should be prepared to lay down more of a down payment than you would have to for a standard fixed-rate loan. Jumbo loans typically require 20 to even 30 percent down payment against the purchase price of the house.

You really shouldn’t have any need of a jumbo mortgage loan unless you definitely have the credentials to pay it off on time. If you are looking at jumbo-range homes but you aren’t sure of your pay back ability, think more than twice before signing.

Author: Joseph Mclaughlin
Article Source: EzineArticles.com
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