Jumbo Loans

When a home buyer applies for a mortgage, the application is handled by a mortgage lender or bank. Payments are also made to that bank once the loan is underway. The bank does not usually retain the loan. Most banks sell those loans to either Fannie Mae or Freddie Mac, the two government sponsored enterprises that control approximately 90 percent of the country’s secondary mortgage market.

Freddie Mac and Fannie Mae limit the maximum dollar value of any mortgage they purchase from an individual lender. In 2006, the limit was $417,000 for the continental United States. In some areas of the country where cost of living is high, this is not enough to cover a typical home. More affluent buyers also may wish to invest more than this in their home. Jumbo mortgages allow buyers to purchase beyond these limits.

How Jumbo Mortgages Work

With a jumbo mortgage, the lender sells a portion of the loan to Freddie Mac or Fannie Mae. The portion outside of the limit is sold to other large investors, such as nationally known banks or insurance companies.

Because these loans represent a bigger risk to the bank, and because the secondary investors charge higher rates for the loan, a jumbo loan typically has a higher interest rate than a conventional mortgage. In spite of this, the jumbo mortgage typically represents the most affordable option for those buyers who need to purchase a high-value property.

Temporary Increase

In 2008, President George W. Bush signed an economic stimulus package. Part of the package temporarily increased the limit from $417,00 to $729,750 for high property value areas. The loan limit is either $417,000 or 125 percent of the median house price in the area, whichever is larger. The increase was set to expire at the end of 2008, but President Obama’s administration has kept the increase in place. Currently, the increase stands until the end of 2010.