FHA Loans: Fannie Mae and Freddie Mac

• The U.S. government guarantees mortgages through two corporations, Fannie Mae and Freddie Mac. These FHA loans require lower down payments and have less stringent credit history requirements. Sounds great -- except not everyone can qualify for an FHA loan.
  
  The government defines jumbo or non-conforming loans, limits the amount that a buyer can borrow and does not guarantee jumbo loans. As of April 2011, jumbo loans usually require higher down payments. Interest rates on these loans are also higher; rates vary, depending on location, credit history and down payment. Borrowers may also be required to pay mortgage insurance, which protects the bank's investment in the event of default.
  
  

Conforming and Non-conforming Limits

• Those interested in buying a one-unit home must first determine if they are looking in a high-cost area, because this information affects jumbo loan limits. For the contiguous 48 states along with the District of Columbia and Puerto Rico, the FHA will not guarantee any mortgage for a one-unit home over $417,000, pushing the mortgage into jumbo territory. For 2-unit homes, the limit is $533,850; for three-unit homes, $645,300; and for 4-unit homes, $801,950.
  
  In Alaska, Guam, Hawaii and the U.S. Virgin Islands, the limits are even higher. The one-unit home limit is $625,500. For two-unit homes, the limit is $800,775; 3-unit homes, $967,950; and 4-unit homes, $1,202,925.
  
  Exceptions apply. In 2008, the Housing and Economic Recovery Act provided for would-be homeowners in expensive areas located in the 48 contiguous states. For example, if you live in the New York City metropolitan area, you may find that the FHA limit is actually $729,750; this means you may be eligible to take out a $700,000 home loan with only a 3.5 percent down payment and "average" to "good" credit.
  
  

FHA Loans versus Conventional Loans

• Not all borrowers may be interested in a government-backed loan. In this case, the borrower applies for a "conventional" mortgage. Both conforming and non-conforming (jumbo) loans may be conventional. Private businesses back conventional loans, and usually require larger down payments. Credit requirements are more stringent, as well. On the other hand, FHA loans require an insurance premium that's paid up front. Properties must also meet minimum standards and pass a termite inspection. Regardless of whether or not your loan is an FHA mortgage, however, jumbo loan limits still apply.
  
  

Jumbo Mortgage Interest Rates

• It costs more to borrow more, and it's not uncommon for jumbo loans to average interest rates roughly 3 to 5 percent higher than conforming-loan rates. Because Fannie and Freddie do not back nonconforming loans, lenders assign these mortgages more risk. Although the vast majority of jumbo loans are performing -- borrowers pay on time -- lenders want the extra interest income to cover the expense of a possible default.
  
  Qualifying for a jumbo loan in 2011 is tricky. Buyers should be prepared to have bigger down payments, at least 20 percent, and possibly mortgage insurance. Excellent credit is required, as well.