Jumbo Loan Freeze is Slowly Thawing Out

By:
Kirk Haverkamp - MortgageLoan.com

There’s good news for well-off homebuyers looking to take advantage of current market conditions – jumbo mortgages are coming back.

The past six months have been a frustrating time for persons interested in buying homes at the upper end of the market. While low interest rates and home prices have set off a near-frenzy in buying and refinancing moderately priced homes, more affluent borrowers have been virtually locked out of the market as banks clamped down on jumbo loan offerings.
 
But all that’s starting to change. With indications that the worst of the economic downturn may be over, lenders are once again venturing into the jumbo loan market, although cautiously. And while potential borrowers will still face significant challenges, those who can qualify for a jumbo loan these days will be able to take advantage of some very attractive rates.
 
Jumbo loans, also known as nonconforming loans, are those that exceed the maximum values for mortgages to be guaranteed by Fannie Mae or Freddie Mac. Currently, the limit is $417,000 in most parts of the country, although higher limits are commonly allowed in more expensive limits, up to a maximum of $729,000.
 

Jumbos riskier for lenders

 
Because Fannie Mae and Freddie Mac won’t guarantee them, jumbo loans carry higher interest rates than “conforming” loans do. That’s also why the jumbo loan market dried up while conforming loans exploded – in an unstable economy, lenders were reluctant to take on the risk of large, non-guaranteed loans, even though interest costs were at historic lows.
 
But things are turning around. Current jumbo mortgage rates are their lowest in four years, though you’ll still typically pay about a percentage point more for a jumbo loan than you will on a conforming mortgage. And jumbo loan activity is still fairly subdued, about 5 percent of total mortgages, compared to 15 percent a few years back.
 
To qualify for a jumbo mortgage these days, you’re going to need very good credit – a score of at least 720, though some lenders may demand 740 or even higher. Plan on making a hefty down payment as well – 20 percent at a minimum, in some cases as high as 40 percent. You’ll also need to show significant secondary assets, thoroughly document your income and keep your debt-to-income ratio on the new mortgage at 38 percent of pretax income or below.
 
Because they’re not guaranteed, many lenders keep jumbo mortgages on their own books and collect the interest themselves, rather than selling them off to investors, as is typically the case with conforming mortgages. This means the market for jumbo loans tends to be more varied than it is for conforming mortgages, so interest rates and terms may vary widely. Here, even more so than in conventional loans, it pays to shop around.
 

An ARM may be your best bet

 
With the direction of the economy still uncertain, many lenders may be reluctant to commit to a 30-year or 15-year fixed rate loan on a jumbo mortgage. Instead, you may have better luck seeking an adjustable rate mortgage, perhaps a 5-1 or 7-1 ARM (fixed rate for five or seven years, then resets every year after that).
 
This can actually be to your advantage, because jumbo ARMs carry significantly lower rates than fixed-rate loans do – a difference that adds up quickly when you’re dealing with the greater loan amounts involved in a jumbo mortgage. In addition, persons with the resources to obtain a jumbo loan in the first place are likely to have the financial savvy to understand how to manage their finances to realize maximum benefit from the savings an ARM provides and be ready to refinance an ARM when the time comes.
 
Again, qualifying for a jumbo loan, either to buy a home or refinance an existing mortgage, is going to be considerably more difficult these days than on a smaller, conventional loan. But with interest rates so low and high-end home prices taking a tumble as well, there are great opportunities out there for those who can qualify.

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