Jumbo loans have never been cheaper, making it easier to buy or refi

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Jumbo loans have never been cheaper than they are right now.

The average cost of a 30-year, fixed-rate jumbo mortgage continues to smash records this fall. The average rate has dropped to as low as 4.16%, according to our survey of major lenders.

If you can meet the tough lending requirements, plenty of banks are willing to write one of these big mortgages.

In most communities, you'll have to take out a jumbo mortgage if you need a loan of $417,000 or more. In some of the nation's most expensive cities, however, you'll need a jumbo loan only if you borrow at least $625,000.

Here's why: Congress limits how big a mortgage the two big government-owned companies that finance much of today's lending can buy.

Any loan too big for Fannie Mae and Freddie Mac, as they are commonly known, is called a jumbo loan. These loans come with slightly higher interest rates than you'll find on what are called "conforming loans."

But the difference in price between jumbo and conforming loans has shrunk considerably.

"Three years ago, the spread was almost two points," says Amy Tierce, regional vice president of Fairway Independent Mortgage in Needham, Mass. "Now, it's a healthier half-point spread, and the adjustable rates are very aggressive."

Jumbo ARMs are attractive

Borrowers often start by looking at fixed rates, but Tierce counsels them to consider adjustable rates, especially 7- or 10-year ARMs because the lower initial interest rate can save borrowers a bundle.

Robert Cohan, president of Carlyle Financial, a mortgage bank in Beverly Hills, Calif., says a typical jumbo loan borrower can save $100,000 over the time they own a home by taking out an ARM instead of a 30-year fixed loan.

"For a jumbo loan, to save a percentage point makes a huge difference," Cohan says.

You can use our extensive database to search for the best fixed or adjustable jumbo mortgage rates in your area.

Our mortgage calculator can help you figure out the payments for any fixed-rate loan.

Prepare for a lengthy approval process

A super rate doesn't help, however, if you can't get approved. The good news is that banks are looking at jumbo loans as a solid investment as the market improves.

With the real estate market stabilizing, banks are willing to make jumbo loans again.

"The banks are more comfortable now," she says. "The requirements are so extreme, that these are really good loans to have in their portfolio. The banks like the quality of the lending."

Indeed, the qualifying process remains long and involved. Be prepared to have your application closely scrutinized.

And be sure to allow plenty of time to get a jumbo loan.

"It will take a full 60 days to do a jumbo purchase today," Tierce says. "Some lenders will say they can do it in 60 days, and it will really take 90."

Jumbo loan qualification

5 things lenders will examine
Income The lender will require full documentation dating back several years.
Credit score Most lenders will require a credit score of at least 740, says Paul McFadden, a loan officer with The Legacy Group in Bellevue, Wash. That means you need an excellent, almost pristine credit history.
Ability to pay You'll have to demonstrate that monthly mortgage payments will require no more than 36% to 38% of your pretax income.
Total debt You'll also need to show that your total debt payments, including auto loans and credit card payments, won't consume more than 41% of your pretax income.
Savings Lenders will require you 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.")

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 Paul McFadden, a loan officer with The Legacy Group in Bellevue, Wash.. "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.

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 a few do.

"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."

Banks use a very conservative formula to calculate the maximum asset-based loan you qualify for.

"Different assets are looked at differently," Cohan says. "They'll give you a certain percentage. If it's a stock, they may give you half of the value, for example."

Then the lender uses the value of your asset to determine its potential income.

"Here's an example," Cohen says. "If you had $1 million and we multiplied that by a 4% rate of return, you'd come up with $40,000 per year. We'd divide that by 12 months. We'd use $3,333 as your income for the month."

More borrowers need jumbo mortgages

The demand for these loans is expected to grow because the size of loans Fannie and Freddie can buy in some parts of the country was lowered in October 2011.

Someone may have purchased a home with a non-jumbo loan, but they discover when they go to refinance it that they now must get a jumbo loan.

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.

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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