Jumbo Loans- They are back.

Jumbo loans, which all but disappeared when the credit crunch began in 2007, are making a comeback. Not only that, jumbo mortgage rates have hit a new low of just over 5 1/4%.

Traditionally, jumbo mortgages have been offered at a considerably higher rate than conventional loans. That’s because these loans cannot be sold to Fannie Mae or Freddie Mac and must be held in the bank’s portfolio. Until recently, banks were holding off on making these loans available.

A jumbo loan is a mortgage loan in an amount that exceeds conventional conforming loan limits – which are set by Fannie Mae and Freddie Mac. That limit in 2010 is $417,000 – with a limit of $625,500 in Alaska, Hawaii, Guam, and the U.S. Virgin Islands.

Banks are being careful, even though they consider those wealthy enough to purchase high end homes to be a better credit risk. They’re demanding at least 20% as a down payment, and are putting borrowers through full documentation underwriting procedures.

This return to stricter standards also applies to homes under $417,000 – making it more difficult for buyers in every price range to obtain a home loan, and leading to speculation about the future of home ownership in America. Those who fear that home ownership will be only for the wealthy are forgetting that “average” citizens purchased homes back in the 80’s – when 20% down and strict documentation were the norm, and obtaining a 10% mortgage interest rate was cause to celebrate..

In spite of the return to rigid requirements, applications for jumbo mortgage loans are on the rise. Bank of America, for instance, reported a 10% increase in jumbo loan applications from May to June of this year.

Million dollar homes account for less than 1 ¾ % of the overall market, but sales in this category were up 77% in May 2010 over May of 2009.

Interestingly, the home-buyer tax credit appears to have been partially responsible for the bump in the number of jumbo loan applications. Buyers in this category necessarily had incomes beyond the limits to receive the credit. But because of the credit, more were able to sell their previous homes and “move up” to the jumbo loan price category.

The other reason cited for the rise in jumbo loan applications is pent-up demand for exclusive homes. After many months of being denied the opportunity to buy because jumbo loans weren’t being made, those who can afford million dollar homes are now ready to buy.

The record low interest rates are simply frosting on the cake.

Author: Mike Clover

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