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Understanding Jumbo Mortgages

by Sergio Haros

Posted: January 24, 2007

If you are buying a home in a state with high prices, you know financing can be an issue. This brings up the issue of the jumbo loan.

The mortgage loans industry is unique compared to other financial markets. Why? Well, it has to do with the federal government. Specifically, the government provides mortgage financing to individuals by guaranteeing the debt owed to lenders, much the way a parent might do when co-signing a loan for child.

Loans that the government will secure are known as conforming loans. These loans are much easier to get because the lender carries almost no risk when issuing them. If you default, the government is on the line through agencies such as FHA, HUD, Fannie Mae and so on.

Unfortunately, the government does not provide much assistance to mortgage applicants in areas with high home prices. The various government programs carry cap restrictions over a certain amount depending on the specific agency offer the program. The top cap for a government mortgage is in the $400,000 range. Any loan application for an amount in excess of this figure does not qualify.

Obviously, a majority of homes in many areas require financing in excess of the government caps. Such loans are known as non-conforming or jumbo loans. With a jumbo mortgage, a lender is a bit stricter in evaluating your application because it knows the government will not back it. As a result, you can expect to pay a bit higher interest rate than with a conforming loan.

A jumbo loan is a form of private financing. There are tons of lenders that offer them, but the terms for the jumbo loans vary dramatically. Simply put, you need to shop the loan to various lenders to find the best deal. Even a quarter percent difference in interest rates can save you tens or hundreds of thousands of dollars over the life of the loan.

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Sergio Haros is with Great Western Mortgage - providing stated income no doc loan services.

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