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Here's What Everyone Gets Wrong About Jumbo Loans

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jumbo-loan (Image copyright by Terebinth Tree Portraits & John Solie © 2007-2009)

Jumbo loans -- they're not just for McMansions anymore! The oversize loans are becoming an increasingly viable option for entry-level home buyers in some parts of the country.

So what are they? Jumbo loan mortgages are those for amounts above the limits for government-sponsored loans. In most parts of the country, that means over $417,000, but in areas where the cost of living is extremely high, the threshold jumps to $625,000. (You can check the limit in your local market.)

But these XXL loans have a reputation of being expensive and hard to get, causing some eligible buyers to dismiss them out of hand -- and stick with a more traditional conforming loan. (Conforming loans meet certain guidelines specified by Fannie Mae and Freddie Mac in terms of the size of the loan, the borrower's debt-to-income ratio, and documentation. These loans usually have lower interest rates than nonconforming loans such as jumbos.)

While the jumbo loans of the past may have presented more barriers to home buyers, recent lending trends have made them more accessible. Read on to learn about four myths around jumbo loans -- and to find out the truth!

Myth No. 1: They're only for buying mansions

In expensive cities with a hot housing market, you'll be hard-pressed to find much housing stock that would require a mortgage within the conforming limits. If you live in San Francisco, for example, where the median home price tops $1 million, most home buyers would qualify for jumbo loans. In other parts of the country, rising home values have pushed even some middle-class homes into jumbo territory.

"In some markets, the first-time buyer is looking at a jumbo loan," says Bob Walters, Quicken Loans' chief economist.

Myth No. 2: You need a huge down payment to qualify

It used to be that lenders required down payments of as much as 30% to secure a jumbo loan. That's not always the case any more. Lenders competing for qualified buyers have loosened up on that standard, with some banks now offering jumbo loan financing for as little as 10% down. Plus, unlike with conforming loans, putting down less than 20% on a jumbo loan doesn't automatically trigger the need for costly private mortgage insurance.

To qualify for a lower-down-payment jumbo, you will need impeccable credit and may face stricter requirements regarding your debt-to-income ratio and cash reserves -- but lending requirements have been easing steadily for the past three years. As with any mortgage product, it pays to shop around to make sure you're getting the best rate.

Myth No. 3: You'll get a better rate on conforming loans

During the housing boom, jumbo rates were around a half-point higher than the rates you could get on a conforming loan. Recently, however, those rates have converged, with some banks offering jumbo products at rates lower than those found on conforming loans. The average rate on jumbo loans was 3.8% in late February, while conforming loans had a rate of about 3.85%, according to the Mortgage Bankers Association.

"In markets where there is a lot of jumbo activity and all the lenders want market share, the pricing competition is fierce," says John Pataky, executive vice president of EverBank.

Myth No. 4: There are fewer options

For a few years after the mortgage crisis, the big banks were the only ones making jumbo loans, which lenders typically keep on their books (rather than selling them to Fannie and Freddie once the loan is made). As the market has improved, however, more small lenders are returning to the space, along with online, nonbank lenders such as Quicken and startups such as SoFi.

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