More borrowers need jumbo loans this fall; fortunately they're cheap
More borrowers now need jumbo loans to buy or refinance homes.
Fortunately, jumbo mortgage rates are at record lows.
"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."
Two big government-owned companies buy most of the mortgages issued by banks and other lenders. They either hang onto them or resell those loans to investors such as hedge funds.
But Congress sets strict limits on the size of loans Fannie Mae and Freddie Mac, as those companies are commonly called, may purchase.
Home loans that are too big for Fannie and Freddie to buy are called jumbo loans.
Although they've been accounting for almost one in every six mortgages written this year, that's expected to increase because the size of loans Fannie and Freddie can buy in some parts of the country was lowered on Oct. 1.
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'll often hear loans that Fannie and Freddie can purchase called "conforming loans" because those mortgages meet or conform to all of their rules.
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.
The average cost of a 30-year, fixed-rate jumbo home loan slid to an all-time low of 4.76% in November 2011, according to our survey of major lenders.
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.
The average cost of a jumbo loan is still more than borrowers must pay for a similar conforming loan, although the gap 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 about half a point.
Over the next few months, we'll have to watch and see if more borrowers pursuing jumbo loans drives up their cost or allows lenders to impose stricter standards for obtaining them.
David Jones, chief credit officer of SVB Financial Group in Santa Clara, Calif., says 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.
If you need to apply for a jumbo loan, 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. That's actually an improvement over the down payment requirements for jumbo loans in the past.
The bigger the loan, the more likely banks and mortgage companies 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."