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Where Did Jumbo Loans Go?

I had a call recently from a homeowner concerned that given his property’s list price a prospective buyer would not be able to secure financing. He was under the impression that Jumbo Financing was no longer available. I assured him that like all other types of financing it still existed it just looked very different.

Prior to the credit crunch, three years ago, a jumbo loan was any loan amount over $417,000. All loans under $417,000 were considered a conventional conforming loan amount and was funded by lenders and sold to FannieMae (FNMA) and FreddieMac (FHLMC) per their guidelines. Any loan over that amount was considered a Jumbo loan. This simply meant that the loans were securitized and sold to institutional investors on the secondary market at a higher rate than the FNMA or FHLMC loans.

When the credit crunch hit Jumbo loans were one of the first casualties (just behind the sub-prime lending market). Since the government did not back these loans they were a much riskier loan (hence the higher rate). As the credit markets imploded investors stopped purchasing Jumbo loans and the market all but ceased to exist for several months in 2008.

That’s when the Federal Government stepped in and created a new category of loan, the High Balance Conforming loan. The standard conforming product still exists for loan amounts under $417,000. The High Balance Conforming category has slightly more conservative parameters and a slightly higher interest rate. It was created to fill the void left by Jumbo loans and enabled FNMA and FHLMC to purchase these higher balance loans. In Los Angeles and Orange County this meant any loan over $417,000 and under $729,750 would fall into this new category (In San Bernardino County this meant up to a $500,000 loan amount). The maximum loan limit varies by county and is determined by the government.

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After a protracted period Jumbo loans have started to reappear for those buyers needing loan amounts higher than $729,750. The problem has been that there are no secondary market investors on Wall Street who want to purchase these loans given the losses that have been taken over the last three years. This has meant that the lending institutions (primarily banks) have had to hold these loans in their portfolio rather than sell them for profit, hoping to sell them at a later date. Since this is an added risk for the lender the guidelines have been significantly tightened to offset any potential risk.

So are jumbo loans available? Yes but be prepared to put more down payments, typically at least 20%, have at least a 720 FICO score and have substantial reserves in the bank at closing. Because these loans are not being sold to a common investor you will find a wide variance in underwriting requirements and pricing. It pays to shop in advance of your home purchase for Jumbo Financing due to the wide variety of parameters and pricing.

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So while Jumbo Financing may look different than it did before the credit crisis it is still available for a well qualified buyer. It may just require a bit more leg work.

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