Jumbo mortgages are surprisingly affordable and easier to get
Jumbo mortgage rates are lower now than they were last spring or winter.
"Pricing now is very aggressive," says Paul McFadden, a loan officer with The Legacy Group in Bellevue, Wash., and strict qualification requirements "are easing up very slowly."
As a result, jumbo loans are accounting for almost one in every six mortgages right now.
We can only hope that doesn’t change this fall when the upper limits of so-called conforming loans are scheduled to be reduced, throwing more people into the market for jumbo home loans.
Two big government-owned companies buy most of the loans issued by banks and other lenders and either hang on to them, or resell those loans to other investors.
But Congress sets strict limits on the size of loans Fannie Mae and Freddie Mac may purchase.
Right now, they can only buy loans up to $417,000 in most parts of the country or $729,750 in high-cost cities such as New York and San Francisco.
The upper limit of $729,750 was the result of a temporary revision signed into law in 2008 by President Bush and extended every Oct. 1 since then.
Don't expect an extension again this year, however. Government agencies reporting to Congress have recommended against it.
Without an extension, the upper limits for non-jumbo loans will fall to $625,000 in high-cost cities. (The limits in lower cost areas will be unaffected.)
That means more people who would have qualified for conforming loans in the past will be looking for jumbo mortgages -- home loans too big for Freddie Mac and Fannie Mae to buy.
Even if the amount you are borrowing is not between $625,000 and $729,750, you'll be affected as more people compete for jumbo loans.
David Jones, chief credit officer of SVB Financial Group in Santa Clara, Calif., expects the jumbo loan market to firm up because only a limited number of lenders provide jumbo loans.
"The people in town that have them are going to be in the driver's seat," he says.
For now, however, the average interest rate for a 30-year, fixed-rate jumbo home loan slid below 5.2% this month, according to our survey of major lenders.
That's down a quarter of a point since March, and not much more than you would have paid in early November, when the average cost of a jumbo home loan reached a record low of 5.04%.
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.
To qualify for one, you'll need a substantial income and a reasonable level of debt. You'll also need a significant down payment (or equity if you're refinancing), although not so much perhaps as you would have needed a few months ago.
The gap between what borrowers must pay for jumbo loans and so-called conforming loans that Freddie and Fannie could buy has narrowed over the past couple of years.
When the average cost of jumbo loans peaked at 7.75% during the worst of the financial crisis in October 2008, it was 1.5 percentage points higher than the average cost of a 30-year, fixed-rate non-jumbo mortgage.
Now the gap is less than half of a point.
The cost of adjustable-rate jumbo loans are even lower -- typically running one percentage point less than lenders charge for comparable fixed-rate loans.
That's one reason ARMs are more popular with borrowers seeking jumbo loans than conforming home loans.
McFadden, for example, sees about 50% of his jumbo loan customers going for ARMs versus only about 20% of his other loan customers.
If you're considering one of these loans, our adjustable-rate calculator can help you determine what the monthly payments would be.
An ARM with a lower rate can make sense if you're planning to move before an ARM begins to reset, often in five or seven years, or if you plan to pay your home off in that time.
If you intend to keep your loan longer, however, think twice about getting an ARM.
Sure, you can save money for now with the ARM. Saving one percentage point can make a huge difference in your monthly payments when you're borrowing that much money.
But rates are so low right now, they have nowhere to go but up. So you might be better off in the long run with a fixed-rate loan.
If you do choose an ARM, you can avoid many of the problems homeowners encountered with ARMs they bought during the housing boom of the early 2000s.
Make sure the rate resets no more than once a year and has reasonable limits on how high it can go and how much it can increase each year.
When the financial crisis struck in 2008, most lenders simply stopped doing jumbo home loans.
Now a growing number of lenders are getting back into the jumbo home loan market.
Your application will be 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 clear before they can qualify for these home loans.
First, you'll need a down payment of at least 20% or have at least 20% equity in your home for a refinancing. That's actually an improvement over down payment requirements for jumbo loans in the past.
The bigger the loan, the more likely lenders are to demand an even bigger down payment.
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 720 to 740, which means you need an average or better than average credit history. McFadden has seen creditors ease up a little on credit score requirements lately. "That's good for self-employed borrowers, who may be wealthy but not have great credit. They maybe got busy and missed a payment."
- 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 do that, you have a chance to take advantage of the best jumbo home loan rates we've seen in years.
One of McFadden's customers is doing just that. His original loan was over 6%, and he just refinanced into a lower interest jumbo loan.
"His closing costs were minimal and should be paid back in two months," says McFadden. "He's saving over $3,000 per month."
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