A "jumbo" loan sounds big. And it is big, at least compared with "conforming" loans, the mortgage-industry term for loans smaller than jumbo. When it comes to home mortgages, the line separating jumbo from conforming is drawn by two government-sponsored enterprises that buy mortgages from lenders. Meet Fannie Mae and Freddie Mac, the people who put the jumbo in jumbo loans.
The bank that extends you a home loan probably doesn't plan on sticking around for 30 years to collect your mortgage payments. In most cases, it will sell the right to collect those payments to someone else, often a mortgage repurchaser that then sells bonds backed by the mortgage payments. That way, the bank gets its money back right away and can lend it to another home buyer. The biggest mortgage repurchasers in the United States are Freddie Mac and Fannie Mae, two government-backed corporations that, as of 2012, held about half of all U.S. mortgages.
Conforming Loans and Jumbos
Fannie Mae and Freddie Mac won't buy just any mortgage. By law, they buy only those loans that meet certain underwriting standards, and they can't buy any mortgages above a certain amount. Loans up to that amount are referred to in the mortgage business as "conforming loans," because they conform to the big repurchasers' limits. Loans bigger than conforming are jumbo loans. Since they are too big for the lender to sell to the biggest mortgage repurchasers, jumbos represent a bigger risk for the lender, so they typically carry higher interest rates.
Defining a Jumbo
Housing prices vary across the U.S., and so do the conforming loan limits. Therefore, a loan that's a jumbo in, say, Des Moines, Iowa, might be conforming in San Francisco. As of 2012, the general conforming loan limit across the country was $417,000 for a single-family home. Limits were up to 50 percent higher in counties with a high cost of living; the biggest loan on a single-family home in any area that could be sold to Freddie Mac or Fannie Mae was $625,500. Congress has the power to change specific limits and the formula for determining general limits. The Federal Housing Finance Agency keeps track of the limits by county.
Fannie Mae and Freddie Mac also buy mortgages on two-, three- and four-unit properties, so loans on such properties are also either conforming or jumbo. As of 2012, for example, the general conforming limit for two-unit properties was $533,850, rising to $800,775 in the highest-cost areas. For three-unit properties, the limits were $645,300 and $967,950. For four-unit properties, $801,950 and $1,202,925.
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