The Big Business of Jumbo Loans

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Loan application formThe rich don’t always have it easier. Take Los Angeles for example: although it is home to some of the wealthiest individuals in the country, it also has some of America’s most expensive abodes for sale. In fact, luxury home prices in LA increased by 5.3% from 2015 to 2016. The prices are so high that the median price of a luxury home in Los Angeles is more than twice the median luxury home price in the entire country!

And, yet, these properties are selling. Some homeowners bought these expensive homes with cash. Buyers who couldn’t pay for the property outright took advantage of a jumbo loan.

Just How “Jumbo” Are Jumbo Loans?

According to Top Flite Financial, Inc., a mortgage lender in Michigan, jumbo loans exceed conforming loan limits set by Fannie Mae and Freddie Mac. To be specific, the 2017 limit for conforming loans is $424,100 for most states in the United States. In Los Angeles, the limit for the same year is $636,150. Jumbo loans also have higher down payment and interest rates. It is usually 20% to 30% and 1% higher than conforming loans, respectively.

For lenders, conforming loans are easier to make. But some experts say that’s beginning to change. More banks want to offer jumbo loans these days because wealthy home buyers with high incomes and assets put them at less risk. In fact, credit supply for jumbo loans increased by 2.7% from June to July, compared to the 0.3% increase for conforming loans.

The Difficulty with Jumbo Loans

Getting a jumbo loan is difficult even for those who can pay for it, especially because their wealth comes from different types of income, assets, and investments. These wealthy home buyers cannot simply ask for a jumbo loan from a traditional bank. Moreover, experts say that candidates for a jumbo loan usually fail to keep their finances streamlined, which is why they have bad credit scores.

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Buying a house, whether it’s a luxury home or a bungalow, can be a difficult process. What’s important is that the home buyers treat it as a smart investment, though.