Jumbo Mortgages Easier to Obtain, but Expensive
As the housing crisis mellows and government aid continues to flow into the mortgage sector, there is a consensus that Jumbo mortgages are benefiting. These mortgages were among the hardest hit at the inception of the downturn, as lenders moved to curtail risky lending practices, and there was a strong hesitancy to approve anything other than plain vanilla loans for conforming mortgages. While standards applying to Jumbo loans are being eased, however, rates remain high.
As suggested by the name, a Jumbo mortgage is generally a loan that exceeds the principal limits set forth by Fannie Mae and Freddie Mac, whose standards continue to dictate mortgage lending nationwide. The precise limit depends on the location – in order to account for regional differences in the housing market – but ranges from $417,000 to $729,750. Anything less than the Fannie limit is known as a conforming mortgage and anything greater is treated as a Jumbo. Some lenders have even created an overlapping category for mortgages that just exceed the limit known as conforming Jumbo.
Without delving too deeply into the history, suffice it to say that during the housing boom, obtaining a Jumbo mortgage wasn’t much more difficult than obtaining a conforming mortgage, which is to say that they weren’t hard to get. Interest rates were often slightly higher (.3% on average) than conforming loans, and standards were about the same. Of course, you needed to earn more income and/or have more assets, but the ratios that lenders used to determine one’s maximum’s loan size were about the same.
Fast forward to today, where lenders require a 20-25% down-payment for a Jumbo loan. And that is only in a stable housing market! If you need to mortgage a home in a “troubled” region, you can expect to put down even more. It’s not enough to have a documented high income and a stellar credit rating; you need to show that you have enough money in the bank to cushion against job loss and other financial hardship. As for rates, the spread between conforming and Jumbo loans is now 1.55% on average; whereas mortgage rates for conforming loans are now at record lows, jumbo rates are higher than they were during the boom. Basically, delinquency is plaguing jumbo mortgages that were issued during the mortgage boom, and lenders can’t afford the possibility of fresh loans defaulting a few years from now.
Of course, there are ways to get around this lender reluctance. One is to simply put down more money. Some experts testify that making a down-payment of as little as 40% can still result in a waiving of various documentation requirements. For those of you that can’t afford to make a higher down-payment out of pocket, you can consider dipping into your retirement account and/or obtaining a second mortgage that would cover the down payment. Otherwise, you may get stuck waiting for prices to fall further, to the extent that your jumbo loan would be reclassified as conforming, or would at least decline to the point of becoming affordable.
Given that many Jumbo borrowers are in the same boat, a further decline in prices for high-end homes might become self-fulfilling, and you might not have to wait long.
