Just when we thought jumbo loans couldn't possibly get any cheaper, they did.
So far this year, the average cost of a 30-year, fixed-rate jumbo mortgage has been below 4.7%, according to our survey of major lenders.
Jumbo loans are loans larger than the limits on loans purchased by Fannie Mae and Freddie Mac, the two big government-owned companies that buy most of the mortgages issued by banks and other lenders.
The upper limits on these loans vary by location but range from $417,000 in most places to $625,000 in the nation's most expensive cities.
Loans under the limits are called "conforming loans," and the difference in price between jumbo and conforming loans has shrunk considerably.
Back in October 2008, you would have paid about 1.5% more for a jumbo loan. Now they cost less than half of a point more.
You can use our extensive database to search for the best jumbo mortgage rates in your area.
Our mortgage calculator can help you figure out the payments for any fixed-rate loan.
"I think if you're looking for a larger mortgage, it's easier and opening up a bit," says Paul McFadden, a loan officer with The Legacy Group in Bellevue, Wash., but the qualifying process remains long and involved.
Be prepared to have your application closely scrutinized.
"These are never easy," says McFadden. The banks "tend to keep these in their portfolio -- they don't sell them off. It takes a lot longer."
There are two big hurdles borrowers must usually clear.
First, you'll need a down payment of at least 20% or have at least 20% equity in your home for a refinancing.
For bigger jumbo loans, lenders will demand a lower loan-to-value ratio.
"Let's say someone wants a $2 million mortgage," says McFadden. "They're probably not going to be able to borrow 80%. It will probably be 75%."
Then you've got to prove that you can make the substantial monthly payments of $3,000 to $5,000 that these loans require. You'll need to:
- Fully document your income and assets over the past several years.
- Have a credit score of at least 740, according to McFadden. That means you need an excellent, almost pristine credit history.
- Show that your monthly mortgage payments will require no more than 36% to 38% of your pretax income.
- Demonstrate that your total debt payments, including auto loans and credit card payments, won't consume more than 41% of your pretax income.
- Have at least 10% of the amount you are borrowing in bank or brokerage accounts that can be used to make your mortgage payments should you lose your job. (Loan officers call this "post-closing liquidity.")
If you can't meet the income requirements because you're self-employed or retired but have a substantial stock portfolio or real estate holdings, consider applying for an asset-based loan.
Not all lenders offer asset-based loans, but McFadden works with a bank that does.
"Before, you had to prove with your income that you could pay the loan back," McFadden says. "People may have had $2 million in assets, but they were retired. (Some banks) now allow you to use assets as income."
More borrowers are expected to apply for jumbo loans in the near future because the size of loans Fannie and Freddie can buy in some parts of the country was lowered in October 2011.
In most of the nation's 3,000 counties, the limit remained the same -- $417,000.
But Fannie and Freddie can buy somewhat larger loans in cities with much higher than average home prices. The limit in the 250 most costly counties was dropped.
The highest limit in the most expensive cities in the country, such as New York and San Francisco, was reduced from $729,750 to $625,000.
You can find the maximum conforming loan limits for your state and county at the Federal Housing Finance Agency.
The higher limit was enacted on a temporary basis in 2008 when the mortgage crisis struck and private investors stopped buying new home loans.
It was extended each year until now, when Congress decided to return to the old limit.
The change will clearly affect borrowers who would have qualified for a conforming loan under the higher limit but will need a jumbo loan now.
FHA borrowers who need larger loans, on the other hand, are in luck.
In November 2011, Congress moved to allow borrowers under the FHA program to qualify for loans up to $729,750.
The government does not make FHA loans; it guarantees them in case the borrower defaults. FHA loans have additional fees, but with lower minimum down payments and the government's backing, they allow many people to buy a home who otherwise could not.
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