Jumbo loans

Most homeowners have conventional (or as also known conforming) loans, which means that their loans are purchased on the secondary market by organizations like Fannie Mae and Freddie Mac. These organizations basically dictate the upper limit on conforming mortgages, as well as the underwriting requirements (your income, credit history, and so forth). If you need a mortgage that is more expensive than the conforming loan limits, you will need what is called a jumbo loan.

Since Fannie Mae and Freddie Mac will not buy jumbo loans, mortgage lenders assume more risk. The cost of offsetting this risk is passed along to the borrower. For this reason, jumbo loans tend to have higher interest rates and special requirements, like a higher down payment.

It is important to note that jumbo loans are not regulated in the same ways as conforming loans. Since Fannie Mae and Freddie Mac do not control the underwriting requirements, they tend to vary from lender to lender. In other words, some lenders are willing to take on riskier clients than others.

This lack of regulation also makes it possible for there to be a wider range of mortgage products among jumbo loan lenders. Rates and terms can differ significantly, which makes it a little more difficult to compare loans across lenders. For that reason, you may want to budget extra time for jumbo loan processing.

Since families who apply for jumbo loans tend to have higher incomes anyway, the higher interest rate is not the deterrent it might be otherwise. Still, jumbo loans account for only a small portion of the mortgage market.