Searching For Jumbo Mortgage Loan Financing? Beware!

Searching For Jumbo Mortgage Loan Financing? Beware!
By Mike Lesmeister

Borrowers considering homes that require mortgages above the Fannie/Freddie maximum of $417,000 should be aware of the many differences that exist in the qualification and underwriting processes. Generally, Jumbo mortgages are harder to qualify for and demand higher base interest rates. Conventional loans are available up to $417,000 in most areas at interest rates currently averaging below 5% for terms of up to and including 40 years. Jumbo mortgages (above $417,000) are offered by a diminishing number of lenders with rates generally at or above 6% with maximum terms of 30 years.

Another obvious disparity is the minimum required credit rating. Borrowers with FICO scores above 660 meet the minimum score qualification for conventional loans originated by most mortgage lenders. Jumbo loan applicants must apply with credit scores equating to 720 minimum. Additionally, conventional underwriting will allow at least one 30 day mortgage or rental payment delinquency in the prior 12 months (some lenders even allow for one in the past 6 months). Jumbo applicants can have no 30 day late notices over the same period.

Other financial factors that reveal notable differences are in the areas of reserves, maximum loan to value, and debt to income ratios. Jumbo loans require that liquid assets equaling 12 months reserves reside in the borrowers financial portfolio. Conventional borrowers are normally required to prove only 2 months of liquid reserves. As to loan to value ratios; Conventional loans can be written for up to 95% of the value of the home whereas Jumbo loans max out at 75%. Finally the maximum housing ratio (debt to income) allowed for a conventional loans is 43% whereas a Jumbo loan applicant must demonstrate a maximum of 40% total combined mortgage, installment and revolving debt.

There also exist distinct demographic differences which make Jumbo loans far harder to obtain. Geography and property designations are the two most notable characteristics illustrating these differences. Conventional loans can finance the purchase of 1-4 unit properties. Whereas Jumbo loans can only be written for properties with no more than 2 units (duplexes) included. Conventional loans are available for investment properties but Jumbo loans are strictly reserved for owner-occupants. Along these same lines, the common “1031 exchange” used as a source of down-payment funds by investors is not available for Jumbo transactions.

In view of the current deterioration in localized real estate markets, Jumbo loans are completely unavailable in many states including Florida, Michigan, and Rhode Island among others. Conventional loans remain available in all 50 states. Also, Jumbo loans are not available to non-permanent resident and resident aliens as are most conventional programs.

Finally, most lending institutions will not allow “cash-out” Jumbo programs which are generally available on a conventional basis. Certain regional and portfolio lenders offer exceptions to this general rule.

A common practice that has evolved from the impact of these factors is the rapid rebirth of the subordinated second lien used in combination with a conforming (conventional) first to create a combo loan program thus avoiding the Jumbo scenario. This works well for total loan amounts of up to $750,000 which employ a $417,000 first at conventional rates with a $300,000+ 2nd . This allows for a lower down-payment outlay, avoids any private mortgage insurance premiums, lengthens terms and requires smaller reserves etc. to qualify.

Mike Lesmeister is a licensed Texas Mortgage Broker and Partner in Home Loan Specialists, Inc. http://www.hlstx.com a Houston-based mortgage boutique catering to the needs of luxury home buyers in Spring, Tomball, the Woodlands, Houston, and throughout Texas. Mike assists borrowers acquire and refinance residential properties through creative financing strategies, transparent pricing, high ethical standards, and superior client service.

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