History

• Ceilings on FHA loans go back at least 40 years. Because it was created to expand home ownership opportunities to moderate- and low-income families, the FHA has always focused on loans that would help those in lower income brackets. However, as even entry-level home prices rose over the decades, the FHA had to raise its loan limits to remain relevant as an insurer and loan purchaser. By 2010 the FHA's loan limit was $417,000. The limit is lower in some locations because it is based on median home value. Any loan over this limit is called a jumbo loan. By 2008, as a result of the recession, few banks wanted to risk making jumbo loans because they were not government-insured, foreclosure rates were rising and housing prices were dropping. In 2008 the FHA adopted a temporary limit increase to $729,000 in the most expensive markets in the country. Although the program was extended from its initial termination in 2009 to the end of 2010, many banks tended not to offer these loans because of their temporary nature and the continuing fall in housing prices. This temporary two-tier FHA limit led to two classes of jumbo loans---one between $417,000 and $729,000, called the jumbo loan, and one over $729,000, called the super jumbo.
  
  

Geography

• Up to the maximum limits, FHA loan ceilings are based on median home value. Cities and counties on both coasts tend to have the highest ceilings because property values there tend to be among the highest in the country. The lowest maximum in 2010 was $271,000. Any FHA lender can tell you what the FHA loan limit is for your area.
  
  

Rate Spread

• Before the recession beginning about 2008, a jumbo loan was associated with an interest rate of 1/4 to 1/2 a point higher than a conforming loan. Since 2008, however, the spread widened to more than 1 percentage point for jumbo loans and even more for super jumbo loans.
  
  

Combining Loans

• One strategy for avoiding a jumbo loan is to combine a conforming loan with a second mortgage. Although second mortgages also bear higher loan rates than conventional first mortgages, the combined payments on conventional first and second loans may be lower than on a jumbo loan.
  
  

Alternatives

• Another option for home buyers who would otherwise need a jumbo or super jumbo loan is owner financing. This is possible when the seller has a small mortgage or owns his home outright and is in a position to take back the loan himself. All terms, including the interest rate, are negotiable.