Free Rate Update

Qualifying for a Jumbo Mortgage in the Post Boom Era

August 7, 2010 (FreeRateUpdate.com) – Jumbo mortgages are home loans that exceed the conforming limit, or the maximum loan amount that Fannie Mae and Freddie Mac, the two government sponsored mortgage entities, will buy. Fannie Mae and Freddie Mac set the conforming loan limit, which varies by location, every January. Anything above the conforming loan limit is considered a jumbo loan.

From about 2003 to the middle of 2007, lending standards relaxed on jumbo loans as lenders competed for customers. It became typical for lenders to skip over verifying the income borrower’s claimed on their loan applications. It was also typical for lenders to give jumbo loans to homeowners with only 5 percent down payments. But, beginning in August 2007, the credit squeeze scared lenders away from the jumbo loan market.

Lenders are once again offering jumbo loans, however the requirements needed to qualify are much more stringent. Banks are also returning to the jumbo loan market as the stringent credit standards have made the default risk on jumbo loans low.

For those who do qualify, jumbo loan rates are currently appealing. The spread between jumbo and conforming loans has narrowed, and since the average rates on 30 year fixed-rate loans have fallen, the rates on jumbo loans have fallen as well.

So, if you are in the market for a jumbo loan, here are the new rules:

• A down payment, or, if refinancing, equity, of (usually):
• At least 20% down for jumbos up to $1 million
• At least 30% down up to $2 million
• More for loans over $2 million
• An excellent credit score (at least 720 but could be more as some banks report that their average jumbo customer has a credit score in the 760s)
• Income documentation and verification. Borrowers are now required to provide financial records verifying that they earn what they say they earn (some borrowers have been asked to provide two years of their income history).
• Expect to obtain an adjustable-rate loan; fixed-rate jumbos are relatively rare.
• DTI (Debt-to-Income) of less than 38 percent. That means a borrower’s monthly mortgage payment must be less than 38 percent of their income before taxes. The ability to afford to make monthly payments is critical in the jumbo loan market.
Be prepared to shop around. Depending on what part of the country you are in, lenders can have different jumbo loan lending guidelines. Guidelines may also vary depending on the type of dwelling (condo vs. house), whether it is a primary home or investment property (some lenders will only approve jumbo loans for primary residences; others will grant jumbo loans for vacation homes or investment properties).

Jumbo loans are not commodities. Today, most jumbo loans come from the big banks that are keeping loans on their books instead of selling them. Falling property values are still a concern, but with jumbo loans requiring a lower loan-to-value ratio, even if housing prices dropped sharply, the risk to the bank is low. Since interest rates on deposits are currently low, the bank makes money by charging higher interest rates on mortgages than they pay on their customers’ deposits, thereby profiting on jumbo mortgages, even when the mortgage is offered at a low rate. However, keep in mind that rates paid on deposits will someday rise again. Banks are promoting jumbo ARMs whose rates will rise when rates paid on deposits go up. The most popular jumbos are 5/1 ARMs, which have an introductory rate that lasts five years; then adjust annually thereafter.