The housing bubble that has been driving up prices across the country has left house buyers looking for alternative ways to finance their dream home. Unfortunately, many starter homes in certain areas of the country have prices that leave buyers in sticker shock. Many of these buyers find that jumbo loans are the only way they can finance a new home. A jumbo loan, also known as a non-conforming loan, is a residential or commercial mortgage loan that does not conform to the guidelines set by Fannie Mae (the Federal National Mortgage Association) or Freddie Mac (the Federal Home Loan Mortgage Corporation). Basically, it is a loan that exceeds the limit and guidelines that Fannie Mae or Freddie Mac require for loans they are willing to purchase from mortgage originators.
The new conforming loan limits are set every January, and the amounts for a jumbo loan are determined based on those limits. Effective January 1st, 2006, the conforming loan limits are as follows: for houses in the contiguous United States, the maximum loan limit for a single family residence is $417,000. For a two unit property, the maximum loan amount is $533,850. A three unit property loan limit is $645,300 and a four unit loan limit is $801,950. In Alaska and Hawaii, the maximum loan limit for a single unit is $625,000; a two unit, $800,775; a three unit, $967,775; and a four unit, $1,202,925.
As if a jumbo loan wasn't big enough, the designation of super-jumbo loan has been applied to loans over US$650,000. Due to the higher risk associated with these large loans, a jumbo loan usually has a higher interest rate than conforming loans do. One way lenders get around the higher rates is by breaking up the jumbo loan into two separate loans. The advantage of the jumbo loan is that it enables a buyer to finance a primary residence, vacation home, or investment property in markets with high prices. The primary disadvantage of a jumbo loan is the higher interest rate associated with it.