Our analysis of the Austin real estate market for 2nd Quarter, 2009, revealed an elevated inventory of upper end homes. The sluggishness in this market segment has been due in part to higher rates and tougher requirements for jumbo mortgages. This Q and A is intended to clarify jumbo loan confusion, and help you be better prepared to finance higher end homes.
I appreciate the insight and advice of my professional panel: A big thank-you to:
Dan Reagan - Cornerstone Mortgage - 328-2945
David Reed - C D Reed–Integrity Mortgage - 924-6076
First, what is a jumbo mortgage?
Dan: A jumbo mortgage one that is higher than the conforming limit set by Fannie Mae/Freddie Mac. The current conforming limit is $417,000. Fannie/Freddie did categorize certain parts of the country as high cost areas and have increased the limit above $417,000 in those areas. Texas does not have any high cost areas, so $417,000 is the conforming limit across the state.
How do the rates for Jumbo mortgages compare with conforming loans?
Dan: Jumbo rates for 30 yr fixed products are about 1% higher than conforming loans. There are some attractive rate opportunities for adjustable rate jumbo mortgages that are currently in the mid 5’s.
David: Since the secondary market for jumbo loans essentially disappeared during the mortgage “realignment,” jumbo rates have been all over the map. Most lenders offered jumbo loans as high as 2% over conforming rate. There were some portfolio lenders (meaning banks that issue the loan with no plans to sell it, but instead keep it in their portfolio) with good pricing on jumbo loans. These loans are of the hybrid nature, meaning the interest rate is fixed for, say, 3 or 5 years before turning into an adjustable rate.
Before the mortgage crisis hit, a jumbo rate might be ¼ to ½% higher than a conforming rate. Now lenders might price a fixed jumbo rate at 1.5% - 2% higher than conforming. Recently, however, we’ve seen some definite thawing in the jumbo market, with certain lenders getting very aggressive. A few lenders are offering jumbo rates at around 1% higher than their conforming cousins.
For instance, you can find a 30 year fixed conforming rate at 4.75% (with a point) and a jumbo rate at 5.75% (with a point). When you consider that just a few months ago conforming rates were in the 5 - 6% range, this is not bad.
Not all investors are jumping into the jumbo pool, but are keeping their jumbo rates artificially high. When lenders don’t want to issue a certain type of loan they essentially price themselves out of the market.
What is the debt/income ratio for jumbo’s, compared to conforming loans?
Dan: 40-45% total debt to income ratio is typical for most jumbo lending products. Required reserves are typically higher for jumbo financing than the requirements for conforming financing.
What about the down payment requirement?
Dan: There are some opportunities to allow for a 10% down payment, depending on the purchase price, but a rule of thumb is that 20-25% down is typically required for jumbo lending.
David: Most jumbo lenders ask for a minimum of 20% down, but may require more based upon both the loan amount and credit score. For instance, someone with a credit score of 720 may borrow up to $1MM with 20% down; but with a 680 score the maximum loan amount may drop to $650,000. Typically, the higher the loan amount, the more down payment might be required. With a higher credit score, less may be put down.
Jumbo lenders can have their own internal pricing structures, unlike conforming loans underwritten to Fannie or Freddie standards. But commonly jumbo lenders require a minimum of 15% down, while asking for a minimum 680 credit score.
There are other options when higher end borrowers have their own private banker at their retail or investment banking institution. Such private bankers are able to offer more favorable terms, larger loan amounts, and even lower down payments if the borrower has other financial assets, such as stock, bonds or insurance needs. Most every major bank has a private banking division. If you’re one of those with considerable financial assets, the first place you should call for jumbo financing is your private banker.
What about credit scores? Are they higher for jumbo borrowers?
Dan: Most jumbo lenders require a credit score of 720 or higher. There are a few investors that will allow a credit score as low as 660.
What about the loan length for Jumbo’s? Can people get 30 year fixed rate loans?
Dan: 30 Yr fixed loans are available, but those rates will be at least a full percentage point higher than a 5 year adjustable rate mortgage.
Is it still possible to do a 1st and 2nd lien to avoid doing a jumbo loan?
Dan: This strategy is used often as of late. The problem can often be that 2nd lien loan amounts have been reduced quite a bit. The maximum 2nd lien loan is $150,000. So, if a buyer is purchasing a home for $630,000, they can get a conforming loan at $417,000 and a maximum 2nd lien of $150,000, thus allowing the buyer to use only 10% for the down payment.
David: Yes, but 2nd lien lenders have reigned in some of their lending criteria, and have pulled back on the amount of money they’ll lend. Because 2nd liens are in a subordinate position, you will find them harder to qualify for than a conforming 1st lien. For example, someone with excellent credit can get a 1st lien approved with a 49% debt to income ratio. But the 2nd lien lender might only allow a 45% ratio. Second lien lenders are becoming fewer and fewer and their guidelines are tightening every day.
A 1st and 2nd lien combination is always a consideration, but it’s not always a “hands down” choice. The larger the 2nd lien, the more it can wipe out the advantage of having a conforming rate on the 1st. This is because 2nd lien rates are always higher than 1st lien rates by far.
If the sales price of the home is in the mid-jumbo range of $600,000 to $800,000, then the 1st and 2nd lien combo makes sense.
Do you find that appraisers are being harder on higher end homes?
Dan: I wouldn’t say that appraisers are being harder on higher end homes. It can be more difficult to obtain the necessary value for higher end homes due to the availability of recent comparable sales to support the value. Investors typically want comparable sales to be in a recent 90 day period, which is a much shorter time frame than was required in the past.
David: I haven’t had that experience, but higher end homes have fewer comparable sales than those closer to the median, which could impact an appraisal. I had a client who bought a home in West Austin for $695,000 and the appraisal came back at $740,000, so it’s more of what’s sold recently and less of the fact it being a jumbo.
What would you recommend to someone who needs a jumbo loan? What should they expect?
Dan: Jumbo lending conditions have improved over the past few months. There was a time recently when jumbo terms were quite unattractive. Now many investors have decided to jump back into the jumbo lending market. Underwriting turnaround times can be a little longer so I would plan for at least 5 weeks for underwriting to complete their process.
David: Prepare for it like any other loan. Have good credit; expect to put down 20%; and provide two years of tax returns (if self employed), or two years W2s and pay stubs. Jumbo loans, like conforming ones, haven’t as much tightened their lending guidelines, but instead have returned to their original roots.
A common fallacy I still hear nearly every day is that jumbo money isn’t available. Not only is it still available but the rates are becoming more and more aggressive. In the current environment, if you’re a buyer thinking of buying, and you can get a jumbo rate under 6%, there is no reason to wait - because the money is there waiting for you.
I appreciate the insight and advice of my professional panel: A big thank-you to:
Dan Reagan - Cornerstone Mortgage - 328-2945
David Reed - C D Reed–Integrity Mortgage - 924-6076
First, what is a jumbo mortgage?
Dan: A jumbo mortgage one that is higher than the conforming limit set by Fannie Mae/Freddie Mac. The current conforming limit is $417,000. Fannie/Freddie did categorize certain parts of the country as high cost areas and have increased the limit above $417,000 in those areas. Texas does not have any high cost areas, so $417,000 is the conforming limit across the state.
How do the rates for Jumbo mortgages compare with conforming loans?
Dan: Jumbo rates for 30 yr fixed products are about 1% higher than conforming loans. There are some attractive rate opportunities for adjustable rate jumbo mortgages that are currently in the mid 5’s.
David: Since the secondary market for jumbo loans essentially disappeared during the mortgage “realignment,” jumbo rates have been all over the map. Most lenders offered jumbo loans as high as 2% over conforming rate. There were some portfolio lenders (meaning banks that issue the loan with no plans to sell it, but instead keep it in their portfolio) with good pricing on jumbo loans. These loans are of the hybrid nature, meaning the interest rate is fixed for, say, 3 or 5 years before turning into an adjustable rate.
Before the mortgage crisis hit, a jumbo rate might be ¼ to ½% higher than a conforming rate. Now lenders might price a fixed jumbo rate at 1.5% - 2% higher than conforming. Recently, however, we’ve seen some definite thawing in the jumbo market, with certain lenders getting very aggressive. A few lenders are offering jumbo rates at around 1% higher than their conforming cousins.
For instance, you can find a 30 year fixed conforming rate at 4.75% (with a point) and a jumbo rate at 5.75% (with a point). When you consider that just a few months ago conforming rates were in the 5 - 6% range, this is not bad.
Not all investors are jumping into the jumbo pool, but are keeping their jumbo rates artificially high. When lenders don’t want to issue a certain type of loan they essentially price themselves out of the market.
What is the debt/income ratio for jumbo’s, compared to conforming loans?
Dan: 40-45% total debt to income ratio is typical for most jumbo lending products. Required reserves are typically higher for jumbo financing than the requirements for conforming financing.
What about the down payment requirement?
Dan: There are some opportunities to allow for a 10% down payment, depending on the purchase price, but a rule of thumb is that 20-25% down is typically required for jumbo lending.
David: Most jumbo lenders ask for a minimum of 20% down, but may require more based upon both the loan amount and credit score. For instance, someone with a credit score of 720 may borrow up to $1MM with 20% down; but with a 680 score the maximum loan amount may drop to $650,000. Typically, the higher the loan amount, the more down payment might be required. With a higher credit score, less may be put down.
Jumbo lenders can have their own internal pricing structures, unlike conforming loans underwritten to Fannie or Freddie standards. But commonly jumbo lenders require a minimum of 15% down, while asking for a minimum 680 credit score.
There are other options when higher end borrowers have their own private banker at their retail or investment banking institution. Such private bankers are able to offer more favorable terms, larger loan amounts, and even lower down payments if the borrower has other financial assets, such as stock, bonds or insurance needs. Most every major bank has a private banking division. If you’re one of those with considerable financial assets, the first place you should call for jumbo financing is your private banker.
What about credit scores? Are they higher for jumbo borrowers?
Dan: Most jumbo lenders require a credit score of 720 or higher. There are a few investors that will allow a credit score as low as 660.
What about the loan length for Jumbo’s? Can people get 30 year fixed rate loans?
Dan: 30 Yr fixed loans are available, but those rates will be at least a full percentage point higher than a 5 year adjustable rate mortgage.
Is it still possible to do a 1st and 2nd lien to avoid doing a jumbo loan?
Dan: This strategy is used often as of late. The problem can often be that 2nd lien loan amounts have been reduced quite a bit. The maximum 2nd lien loan is $150,000. So, if a buyer is purchasing a home for $630,000, they can get a conforming loan at $417,000 and a maximum 2nd lien of $150,000, thus allowing the buyer to use only 10% for the down payment.
David: Yes, but 2nd lien lenders have reigned in some of their lending criteria, and have pulled back on the amount of money they’ll lend. Because 2nd liens are in a subordinate position, you will find them harder to qualify for than a conforming 1st lien. For example, someone with excellent credit can get a 1st lien approved with a 49% debt to income ratio. But the 2nd lien lender might only allow a 45% ratio. Second lien lenders are becoming fewer and fewer and their guidelines are tightening every day.
A 1st and 2nd lien combination is always a consideration, but it’s not always a “hands down” choice. The larger the 2nd lien, the more it can wipe out the advantage of having a conforming rate on the 1st. This is because 2nd lien rates are always higher than 1st lien rates by far.
If the sales price of the home is in the mid-jumbo range of $600,000 to $800,000, then the 1st and 2nd lien combo makes sense.
Do you find that appraisers are being harder on higher end homes?
Dan: I wouldn’t say that appraisers are being harder on higher end homes. It can be more difficult to obtain the necessary value for higher end homes due to the availability of recent comparable sales to support the value. Investors typically want comparable sales to be in a recent 90 day period, which is a much shorter time frame than was required in the past.
David: I haven’t had that experience, but higher end homes have fewer comparable sales than those closer to the median, which could impact an appraisal. I had a client who bought a home in West Austin for $695,000 and the appraisal came back at $740,000, so it’s more of what’s sold recently and less of the fact it being a jumbo.
What would you recommend to someone who needs a jumbo loan? What should they expect?
Dan: Jumbo lending conditions have improved over the past few months. There was a time recently when jumbo terms were quite unattractive. Now many investors have decided to jump back into the jumbo lending market. Underwriting turnaround times can be a little longer so I would plan for at least 5 weeks for underwriting to complete their process.
David: Prepare for it like any other loan. Have good credit; expect to put down 20%; and provide two years of tax returns (if self employed), or two years W2s and pay stubs. Jumbo loans, like conforming ones, haven’t as much tightened their lending guidelines, but instead have returned to their original roots.
A common fallacy I still hear nearly every day is that jumbo money isn’t available. Not only is it still available but the rates are becoming more and more aggressive. In the current environment, if you’re a buyer thinking of buying, and you can get a jumbo rate under 6%, there is no reason to wait - because the money is there waiting for you.
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