Real Estate in Park City : Introduction to Jumbo Loans
The Park City real estate market currently has hundreds of loans that would qualify as "Jumbo" read on for more information by Mr. Trento.
For the most part, a jumbo loan is the same thing as a traditional
loan. As the name implies, it is a larger loan than is traditionally
given out. Across the country, Fannie Mae and Freddie Mac buy up the
majority of residential and commercial loans issued. When the loan is
too large for them to buy up, the mortgage brokers list it as a jumbo
loan. As loans increase in size, the risk that is associated with them
increases. Although Fannie Mae and Freddie Mac normally try to buy out
loans to free up capital in the market, the added risk makes it
impossible with this specific class of loans.
Setting the Limits
Fannie Mae and Freddie Mac operate as government-backed mortgage
brokers. As the main purchasers of mortgage loans on the market, they
set the limit for how high mortgages are before they are listed as
jumbo. Since a $50,000 loan and a $5 million loan carry a different set
of risks, the terms offered are different. In 2010, any loan that was
over $417,000 was listed as a jumbo loan officially. In certain parts of
the country, the higher price of land and cost of living push the limit
up to $625,500. The specific areas the higher limit affected were the
Virgin Islands, Hawaii and Alaska. A loan that is higher than these
limits carries a much higher interest rate and requires a larger down
payment. When the economy fluctuates, the limits for jumbo loans will
change as well.
Higher Interest Rates and Higher Costs
Jumbo loans tend to have a higher default rate than traditional
loans. To help mortgage companies leverage the risk, the jumbo loan must
carry a higher interest rate. In recent years, lenders have also chosen
to develop more stringent policies to protect their business from added
risk. These stricter lending guidelines make it more difficult to get a
jumbo loan, but also serve to drive down the interest rate.
Another way lenders try to protect their institution from risk is by
raising the down payment requirement. For smaller loans, borrowers with
good credit often only pay 5 percent of the loan amount or less as a
down payment. With jumbo loans, the borrower pays at least a 20 percent
down payment to secure the loan. Generally, a lender will also look for
borrowers who have consistent, high incomes as well as at least a 720 on
their credit score.
Why is There More Risk?
Jumbo loans are not just risky because of the money amount loaned
out. These high-dollar loans carry other risks as well. Most jumbo loans
end up buying property like luxury homes that are out of the price
range of a normal consumer. If the loan is defaulted on, it can take
months and years longer to sell than cheaper properties to sell. As the
bank waits for the foreclosed on house to sell, the property value
gradually drops as the years go by.
If a borrower runs into economic troubles and needs to refinance, the
process is much more difficult with jumbo loans. Logically, it costs
more to close the loan because of its high-dollar value. Borrowers are
unable to refinance their loan and simultaneously unable to afford the
one they have. Over the course of a few months, the borrower may start
to fall behind on mortgage payments. If this happens, the lender is
still stuck with trying to sell a foreclosed on house.
The higher value of the loan is not just a risk to the lender; the
borrower stands to lose as well. When home prices fluctuate with the
market, a luxury home owner will suffer a higher-dollar value loss when
the economy takes a tumble for the worst. On the bright side, if the
economy improves, the owner of the residential or commercial property
can potentially make money off of their investment.
Tagged as: Real Estate in Park City, Park City Real Estate
Repost of Mr. Trento n, Jon ah on April 23, 2012
Derrik Carlson
www.RealEstateInParkCity.com
Email: Carlson@RealEstateInParkCity.com
Phone: 435.200.5478
Keller Williams Park City
